Commercial real estate executives are largely bullish about the US market over the next 12 months, according to DLA Piper's 2017 State of the Market Survey. But their optimism continues to level off after the high points seen earlier this decade.
Sixty percent of respondents were bullish about commercial real estate, compared with 62 percent in 2016. Both results were lower than the optimism levels of 2013 and 2014 – but, for the fourth straight survey, the majority of respondents trended optimistic.
"While the good times keep rolling for commercial real estate, it's clear there are questions about just how long they can last," said John Sullivan, chair of DLA Piper's US Real Estate practice. "Respondents know that the current positive economic cycle is more than eight years old, and they see turmoil around the world in the news each day. Still, it's clear that capital is available – and there's a wide-reaching sentiment that the United States remains the safest destination for investment."
Abundant debt and equity capital and the strength of the US economy were the top two reasons for optimism cited by bullish respondents. Bearish respondents – after a year that has seen the election of Donald Trump, Britain's vote to leave the European Union and escalating tensions with North Korea – cited domestic political and geopolitical uncertainty, followed by rising interest rates, as principal reasons for their lack of optimism.
Most respondents believe foreign direct investment in US properties will remain strong – with Chinese investors leading the way. About a third of respondents said foreign investors will be the most active investors in the US, followed by private equity, pension funds and REITs. Recent decisions by Chinese regulators limiting outbound capital may impact these expectations – and this will be a topic explored at DLA Piper's 2017 Global Real Estate Summit in Chicago.
While it's been a challenging year for the retail sector, with respondents acknowledging that a substantial metamorphosis is needed – but most believe it is achievable. Only 8 percent of respondents said retail was “doomed” – and 68 percent said smart retailers would find the right balance between brick and mortar and e-commerce through omni-channel retailing. Another 21 percent said retail would be successful in its repositioning through new mixed-use projects and redevelopment and repositioning of existing shopping centers.
As one respondent said, "There will be less retail, but brick and mortar will always have a place. Businesses that are vulnerable to the internet will need to adapt. The weak will die. A lot of real estate will be repositioned. This will require a lot of capital."
Other highlights of DLA Piper's 2017 State of the Market Survey include:
- Ninety-two percent of respondents said interest rates will go up in the next 12 months, up from 72 percent last year. Respondents are likely attuned to signals from the Federal Reserve and growing accustomed to regular rate increases.
- More than half of respondents (53 percent) saw continued slowing of the Chinese economy as the biggest factor that could impact global commercial real estate. Among other concerns, rising tensions with North Korea (30 percent) and Brexit developments (24 percent) were the top choices.
- More than half of respondents named the healthcare and industrial sectors as the most attractive categories for commercial property investment, followed by data centers.
- For the second consecutive year, respondents said they saw greater opportunity for CRE investment in non-gateway cities than in gateway cities. When asked to rank non-gateway cities, respondents expected Austin and Seattle to perform best, with Denver and Nashville also seen as top investment destinations.
The survey coincides with DLA Piper's 2017 Global Real Estate Summit to be held in Chicago on September 26, 2017 which will be attended by many of the executives included in the survey.
The complete State of the Market Survey report can also be found at www.dlapiperresummit.com.