The latest ULI global research supports a consistent theme across the Americas, Europe and the Asia Pacific region. Although some caution is creeping into the market, abundant capital is still targeting commercial real estate and looking for opportunities with good risk-adjusted returns to grow portfolios.
“Generally, what we are seeing across the three regions is that investors are becoming increasingly cautious on investments in real estate,” says Lisette van Doorn, chief executive officer of ULI Europe. The Institute recently hosted an online panel discussion of key findings for its Emerging Trends in Real Estate Global Outlook for 2019. The Global Outlook is based on a compilation of three regional research reports that ULI conducted along with PwC for the Americas, Europe and the Asia Pacific region, along with individual interviews with global real estate leaders.
Some of the main concerns cited that are related to the economic outlook are political uncertainty, negative impact from trade wars, and slowing economic growth. Yet despite caution and concerns, investors still see positive signs across commercial real estate. That optimism is based on a comparison of where the market is now versus the peak in late 2007 and early 2008, notes van Doorn. Today, there are lower levels of debt, less new supply that has been added to the market, and a more limited development pipeline.
Another common theme is growing concerns about how structural shifts will affect property obsolescence. Investors recognize that they are operating in a new world of accelerated change in technology and climate, as well as changes in social behavior and generational preferences, that are all putting more pressure on operational management of assets.
Structural shifts are evident across property sectors ranging from the growing demand for services and amenities in office properties to logistics facilities that are pushing more into urban locations. Transformation in retail is certainly one of the most talked-about sectors in terms of obsolescence. “The audience keeps coming, but we just need to constantly invest to make it new and sharp, and it requires a lot of attention,” says Marieke van Kamp, head of private markets at NN Group, a leading Dutch insurance and investment management company. “It’s a lot more intensive in management relative to many years ago,” she says.
Slowing Growth in the United States, Europe
Despite concerns about late-stage real estate investing, no one global cycle exists. Individual markets and countries are at very different stages. “There is no single cycle,” says John So, managing director of Metropolitan Real Estate, a Carlyle Solutions Group company. For example, the U.S. office market may be late cycle, while it could still be very early for residential markets in Australia, he says.
In the United States, the economy has been on a steady path of recovery and growth for the past decade. Recent data on employment growth have provided some reassurance that the economy is still growing, although the pace of growth is expected to slow. Limited new supply along with the Federal Reserve Board’s recent pause on interest rate hikes also are viewed as positive for capital markets.
At the same time, some interesting shifts are occurring with demand in this market cycle, notes Michael Spies, senior managing director, Innovation, India and New Markets at Tishman Speyer. “While markets have been very strong and values have been growing in a lot of markets, the nature of absorption is much more nuanced than it has been in the past,” he says. Some markets have been seeing strong growth, while others have experienced very little positive net absorption with some sectors that are growing and others that are contracting. “It has become trickier to read those nuances, but that is the key to investing in this market,” says Spies.
The underlying real estate markets remain stable in Europe even as the region faces uncertainties related to Brexit and some changing political climates within countries. “The high returns that we had in the past few years stayed for longer, but we are bracing ourselves for a lower-return outlook,” says van Kamp. Similar to the United States, the focus in Europe is on what’s hot and what’s not, and retail and logistics have swapped their positions, with industrial being at the top and retail being at the bottom, she says.
Asia Attracting Interest
According to So, there appears to be less foreign capital targeting the United States and more flowing to Asia. That shift is partly due to concerns about the late stage of the U.S. market, as well as taxes and changes related to the Foreign Investment in Real Property Tax Act (FIRPTA) that may be dragging on foreign capital going into the United States.
Particularly for China, it is no surprise to see its economic growth slowing since its high levels of growth were not sustainable over an extended period. Regardless of the trade war, China’s economy has shifted from one that is export driven to more reliance on consumption and investment. Shanghai and Beijing in particular are now very diversified, mature markets with good liquidity, which has reduced investment risk, notes So.
Hong Kong continues to post record-high property prices. “The message for Hong Kong—which is also true globally—is that just because prices are very high doesn’t mean they are going to go down,” says So. Tokyo is likely another market that is past mid-cycle, yet it has some of the most attractive yields spreads in the world at 250 to 350 basis points, he adds. Australia has a self-imposed credit crunch where banks are trying to reduce exposure to real estate, which has created some constraints on new development. “So, there are some parts of Asia that are a little later and a little earlier in the cycle, but for the most part, there are still some interesting opportunities,” So says.