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Property Outlook Falls in Three Tiers

Depending on asset allocations, some investors have felt the negative effects of the pandemic more than others.

Although most respondents (62 percent) said commercial real estate offers favorable returns relative to other investment classes, the sentiment is slightly weaker compared with the second-half 2020 survey when 68 percent held that view. It also remains considerably lower compared with 74 percent who thought returns were more favorable in the first-half 2020 survey. That sentiment is not surprising given the broader context of the negative economic effects of the pandemic, with some property types and cities experiencing a more significant impact. “If you own a hotel, shopping mall or even apartments, you are acutely aware of the pandemic and the challenges it has brought,” says Chang. “So, depending on where an investor has assets allocated, some felt the negative effects more than others.”

When all survey respondents were asked their views on whether they think it is a better time to buy, hold or sell properties across different sectors, nearly half of respondents (46 percent) favored industrial, followed by self-storage at 45 percent; seniors housing at 44 percent; and apartments at 42 percent. Nearly one-third (32 percent) thought that it was a good time to buy hotels. Those property types that rated lower for buyer interest were office and retail at 16 percent each. When the same question was asked only of those investors who already are actively involved in each property type, more investors thought it was a good time to buy. Sixty-three percent of industrial owners thought it was a good time to buy, followed by seniors housing at 60 percent, apartments at 48 percent, office at 44 percent and hotels at 43 percent. Fewer thought it was a good time to buy retail and self-storage at 18 percent and 16 percent, respectively [Figure 3].  

Sentiment on specific property sectors is falling into three distinct clusters, notes Chang. The first cluster contains property types that have held up comparatively well during the pandemic and appear to have sustained near term demand drivers – industrial, multifamily and self-storage. The next cluster includes seniors housing and hotels, which faced a significant impact from the pandemic. However, both property types have good long-term drivers that are tied to vaccinations and the recovery. The third cluster – retail and office – are still under a cloud of uncertainty due to behavioral changes impacting the workplace and retail shopping that could be temporary or semi-permanent. “So, when you look at these three groupings, it is easy to see why sentiment varies so dramatically. Each group is tied to momentum, recovery or uncertainty,” Chang says.

Considering only the property types in which they are currently invested, a majority of respondents were bullish on rising property values over the next 12 months. Industrial led at 72 percent; followed by self-storage at 71 percent, apartments at 64 percent and seniors housing at 59 percent. Nearly half of respondents (47 percent) also anticipate increasing hotel values, while investors were least confident on the outlook for office and retail with only 27 percent and 30 percent, respectively, expecting values to rise in the coming year. Overall changes in value for the next 12 months range from a high of 8.2 percent for industrial to -2.8 percent for retail. [Figure 4]