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Demand outweighs supply

Half of respondents believe now is the time to buy in tertiary markets and/or secondary cities.

Survey results highlight one of the biggest challenges in the current market, which is that there are far fewer sellers in the marketplace than there are buyers. When all respondents were asked their views on whether it is a better time to buy, hold or sell properties, the vast majority was in favor of buying or holding existing assets, while those who said it was a better time to sell were in the minority. “As a result of that imbalance, you’re going to have a competitive bid environment,” says Chang. “Even in a rising interest rate environment, we’re continuing to see some cap rate compression because there is so much momentum to acquire commercial real estate.”

When all respondents were asked whether it is a better time to buy, hold or sell properties across different sectors, most were in favor of buying seniors housing at 48 percent, storage at 42 percent, industrial at 40 percent and apartments at 36 percent. Those property types that rated low for buyer interest were hotels at 32 percent, retail at 20 percent and office at 19 percent. When the same question was asked for those who already own a particular property type, an insider’s view of the market showed a stronger appetite to buy assets in property types across the board. Notably, a far larger percentage of owners said it was a better time to buy seniors housing at 70 percent, industrial at 58 percent and self-storage at 54 percent [Figure 3].
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“That disparity shows that people who own assets have their finger on the pulse of what’s happening within property sectors,” says Chang.

For example, the seniors housing market was severely impacted by the pandemic. Owners had to renovate facilities and change operating procedures. In addition, facilities continue to deal with staffing shortages. As a result, the weakest operators are choosing to exit the field, says Todd Lindblom, First Vice President and National Director of the Seniors Housing Division at Marcus & Millichap. “For those that are successfully operating in this space, this is a golden opportunity. We’re seeing the larger regional and national operators expand, because there are facilities in need of capital and more professional management.” Seniors housing investors are also bullish on the outlook for that sector. Three-fourths (76 percent) expect values to rise over the next 12 months with an average increase of 9.0 percent, compared to 7.5 percent in the second-half 2021 survey.

Survey results also show a strong interest in secondary and tertiary markets. Half of respondents believe now is the time to buy in tertiary markets and/or secondary cities. Likewise, suburban markets are viewed favorably, with 45 percent who think it is a good time to buy in suburban areas of secondary/ tertiary markets and 43 percent see buying opportunities in suburban areas of primary markets. Respondents are less in favor of acquiring assets in primary gateway markets (22 percent), urban areas of primary markets (22 percent) and urban areas of secondary/tertiary markets at 36 percent.

It is worth noting that the percentage of respondents in favor of tertiary and secondary markets has declined, compared to the previous two surveys. In the second-half 2021 survey, those interested in buying in tertiary markets and secondary cities were at 54 percent and 53 percent, respectively [Figure 4].
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“One of the primary reasons investors have been looking at secondary markets is that they offered a higher yield,” notes Chang. The trend favoring secondary and tertiary markets will continue, partly due to the migration trends and growth occurring in smaller metros. However, the secret is out on those markets and increased competition is resulting in cap rate compression that is making it difficult for some investors to find buying opportunities at the yields they want, he says.