Similar to the second-half 2020 survey, 55 percent of respondents said they plan to increase commercial real estate holdings over the next 12 months. Although that percentage is down compared with the 61 percent who expected to increase investments prior to the pandemic, it continues to show a relatively high level of confidence. An additional 35 percent of respondents plan no change to holdings in the coming year, while 10 percent anticipate a decrease. The typical respondent plans to increase real estate investments by an average of 10 percent.
Another factor influencing plans to increase real estate holdings is the changing view on whether the real estate market is approaching a cyclical peak. While 74 percent of survey respondents thought commercial real estate values were near the peak a year ago, just 41 percent now hold that perception. Among the remaining respondents, 30 percent are neutral, and 29 percent do not think values are near the peak. Interest rates also have started to move higher and a majority of respondents (61 percent) expect interest rates to increase further over the next 12 months. “The spread between interest rates and cap rates remains attractive, and expectations that interest rates will rise could spur transaction activity as investors capitalize on the current low rates,” says Evan Denner, executive vice president, head of business for Marcus & Millichap Capital Corp.
Survey results also indicate strong investor appetite for assets in smaller markets. At least half of respondents believe now is the time to buy in tertiary markets (57 percent), secondary cities (55 percent) and suburban areas of both secondary and tertiary markets (50 percent). “The tertiary markets investors are targeting are still relatively large cities that have been attracting strong in-migration for several years,” says Chang. “That trend accelerated last year as the pandemic spurred people to seek more space and a lower cost of living once they were not tied to a work commute into a major city.” Private investors in particular have led the charge into tertiary markets as institutional investors tend to be more cautious with small cities, favoring top-tier assets in those markets, he adds.
At the same time, about one-third of investors believe now is the time to sell assets located in primary gateway markets (32 percent) or urban metro areas of those primary markets (34 percent) [Figure 2]. “The pandemic has sparked an important investor recalibration,” says Chang. Going back even five years most investors were pursuing assets in the urban core, particularly apartments and downtown CBD office assets. That model has changed, at least temporarily. “Investors are pulling back and rethinking their investment strategies,” he says. The question that has yet to be answered is whether the people and businesses that left those urban centers reflect a short-term change that will come back quickly, or whether this is a longer-term structural change, he adds.