There are a number of signs that the broader commercial real estate market (at least in the U.S.) is approaching an inflection point. We turn our attention to the new commercial real estate Global Investor Intention Survey — 2016 just published by CBRE to get a better sense.
As bloggers and members in good standing in the financial community we are all guilty from time to time of the venial sin of talking up our own book. This is an essential part of the way financial markets are understood to work.
It is very much in that spirit that we turn our attention to the new commercial real estate Global Investor Intention Survey — 2016 just published by CBRE. According to the CBRE Survey, the mood of real estate investors remains strongly expansionary this year, with more than $1 trillion earmarked for planned expenditures in real estate markets globally, which represents an increase of 6% over the level reached last year. You can read more about the survey here.
CBRE is one of the most significant players in commercial real estate markets and with a truly global reach, it supports and serves the market in countless ways. So it is with that grain of salt that we read the CBRE Survey’s conclusion that:
The majority of real estate investors (82 percent) indicate that their buying activity will increase or remain the same compared to 2015. While these results are down slightly from the last two years–86 percent in 2015 and 93% in 2014–this is not indicative of widespread concern about the short- or medium-term performance of real estate as an asset class. More likely, it reflects some concerns about pricing, the direction of U.S. interest rates and current volatility in equities.
CBRE further notes that since the survey was conducted in January and February, it effectively captured the relatively negative market sentiment in that period, which makes the investors’ reportedly bullish sentiments that much more striking.
“With more than $1 trillion of capital targeting real estate in 2016,” according to Chris Ludeman, CBRE’s Global President for Capital Markets, “this volume of expenditure will maintain support for global real estate prices.”
Whether Ludeman is right about these investment levels being sufficient to support prices worldwide, the CBRE survey certainly reflects the sort of optimism you would expect in the wake of commercial real estate market’s seven year climb. Since bottoming in 2009, commercial real estate prices have enjoyed a longer and steeper rise than in the run-up period prior to the financial crisis in 2008, according to Green Street Advisors, a prominent real estate advisory firm, with capitalization rates now averaging around 5%.
“Real estate is not cheap any more,” Peter Rothemond of Green Street recently told the Wall Street Journal.
Signs of topping may be starting to flash in some of the frothier commercial markets, like the San Francisco office market, which recently posted its first material increase in the overall vacancy rate since 2009. According to one of the leading San Francisco commercial property brokers, the Class A property vacancy rate there has spiked to 8.5% and there is an increasing overhang of sublet space further softening the market.
Of course, weakness in one local market does not necessarily portend the end to commercial real estate’s long bull run. The increase in Class A vacancy rates in San Francisco says more about the collapse of the IPO market, which is putting pressure on tech startups, than it does about the direction of office rental rates in New York and Los Angeles. But still there are other signs that the broader commercial real estate market (at least in the U.S.) is approaching an inflection point. Perhaps the most telling shift is the sudden surge of foreign buyers, who last year accounted for net purchases of $57 billion of commercial properties in the U.S., compared to an average of $3 billion in net purchases for each of the last 5 years. The emergence of foreign buyers with large sacks of cash is not usually an indication of medium term price stability.