Just as the Association of Foreign Investors in Real Estate was preparing to release its 2020 International Investor Survey, world economies were turned topsy-turvy by the impact of the coronavirus pandemic.
AFIRE's annual report of sentiment, trends and capital flows for global institutional investment in real estate can now probably at best serve as a snapshot of the moment before Feb. 21, the day stock markets started falling. Up until that point, sentiment was reasonably positive, with most prepared to target multifamily and industrial properties.
Foreign investment in U.S. real estate is now a shifting target, Gunnar Branson, CEO of AFIRE, told CoStar: "It's very difficult at this point to do anything other than speculate about where this is going to go."
AFIRE members represent institutional capital, which tends to hold investments for the long term – seven to 10 years. That strategy plays into their thinking about how to respond to short-term disruptions, according to Branson.
"In world-changing events of the kind we're looking at, quite often the weaknesses in the existing system are exposed," he said. "I think part of what people are looking at is where or what are the existing weak spots and strengths. And how will those be either revealed, or are allowed to grow in this new environment."
"I think most people feel that we are entering – at least in the near term and the intermediate term – a new environment in terms of global patterns of spending, space utilization, growth and trade," he added. "Responsible investors are looking at their own portfolios and their own investment strategy and going, ‘OK, where are we strongest? Where are the potential weaknesses? And how do we work through this?'"
Gauging investor sentiment is an important element in making market decisions, according to Abby Corbett, managing director and senior economist in CoStar's Chicago office.
"As institutional investment managers take stock of the challenges and opportunities at hand, valuations will remain sensitive to investor sentiment, and sellers may find that buyer uncertainty impacts underwriting assumptions, bids and negotiations," Corbett said.
The current investor uncertainty could delay transaction negotiations and reduce investment volume in the near term, she said. Buyers may find that their deals become increasingly harder to finance. Pricing power will likely be restrained as buyers potentially take to the sidelines to maintain caution during the early stages of this new economic phase.
AFIRE is polling its members to get a sense of how they are responding to the evolving the COVID-19 virus. It plans to give an update this week. The nonprofit represents the interests of more than 200 investing organizations from 24 different countries.
Before the current period of volatility, Branson said, sentiment about U.S. real estate was positive.
Broadly, 50% of AFIRE members reported intentions for a net inflow of capital to U.S. real estate in 2020, according to the group's annual survey. Only 18% planned net outflows.
Among 70% of investors, continued low interest rates, a stable credit environment, balanced inflation and high employment serve as the basis for a positive U.S. market outlook, the survey revealed. Other reasons for optimism in 2020 include continued economic growth, return opportunities and liquidity of the U.S. market relative to other markets.
Los Angeles, New York and Chicago ranked in the survey as the most stable and secure U.S. cities for real estate investments.
More than 80% of investors said they were seeking to increase exposure in multifamily, while 79% are planning to increase in industrial. Retail is the least-favored property type with 53% of investors seeking to decrease their exposure.
"While COVID-19 presents as a downside risk, some of the dynamics at play present as a potential upside for commercial real estate," CoStar's Corbett said. "A global flight to quality could make private U.S. CRE investment relatively attractive on a risk-adjusted basis, and global investors, particularly institutional investors, could be drawn to the asset classes’ comparative long-term stability and outperformance."
Yet while U.S. commercial real estate continues to perform well, foreign investors noted a range of uncertainties. Rent control measures in New York and California were seen as counterproductive for addressing housing affordability, constraining supply and skewing new development toward high-income housing.
Two-thirds of AFIRE's survey respondents also noted greater risk consideration to climate change issues, such as rising sea levels. Additionally, nearly half of investors included geopolitical issues among their primary concerns for cross-border investing in 2020.
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