Respondents continue to agree that commercial real estate offers favorable returns compared to other investment. However, that sentiment has edged lower since the survey taken prior to the onset of the pandemic when 74 percent favored real estate over other investment classes. Part of the decline may be attributed to the significant rally the stock market has experienced through much of the summer months. Yet real estate continues to present a compelling alternative for investors, especially when considering the ability to leverage very low financing rates. “The yield spread between the 10-year Treasury and the average cap rate for commercial real estate is at its second widest level on record,” notes Chang, offering investors some of the strongest levered yields on record.
Views were mixed on whether the worst of the economic downturn is in the past or still ahead, and how long it may take to achieve full recovery. Half of respondents do not think the worst has occurred, while 24 percent were unsure and 26 percent thought the worst had already occurred. “We may have already started the economic recovery, and we are expecting a pretty sizable economic bounce in the third quarter of 2020,” says Chang. “However, based on current economic forecasts it’s likely that we won’t get back to pre-crisis GDP until 2022.” A majority of investors believe that a full recovery to the economy will come after 2021. Nearly half, 46 percent predict that recovery will come in 2022, 19 percent said 2023 and 12 percent said 2024 or later [Figure 10].
It is no surprise that survey respondents expressed elevated concerns related to a variety of issues over the next 12 months. Chief among them are containment of the coronavirus at 56 percent, state of the U.S. economy at 54 percent, high unemployment at 53 percent, rising vacancy rates at 51 percent and changes to taxes at 50 percent [Figure 10]. Respondents don’t seem overly concerned about the upcoming presidential election. Similar to the first half survey, most respondents (58 percent) report the upcoming presidential election will not impact their 2020 investment plans [Figure 11].
Looking ahead, there are a couple of very big unknowns that could impact commercial real estate performance and further shift investor sentiment and strategies. One is how long it will take to get a vaccine or some type of medical solution in place to better protect the public from health risks associated with the coronavirus. Second is whether Congress approves another stimulus package and how substantive it is in terms of providing relief to individuals and businesses. “The themes that will continue permeating the commercial real estate industry will be fragmentation, uncertainty and caution until we come to terms with these bigger issues that overshadow everything,” says Chang.