Despite a recovery that’s now lasted more than the usual seven years, the current real estate expansion cycle still has legs, according to senior real estate executives surveyed by consulting firm KPMG for its 2017 Real Estate Industry Outlook Survey. But uncertainties in the market—the Trump administration’s tax reform and immigration policies; possible changes to banking regulations; and rising interest rates—have created murky undercurrents. Commercial real estate executives say their companies are taking particular care in navigating the deal-making environment in 2017, emphasizing a “measure-twice, cut-once” approach in investment strategy.
If implemented, Trump’s tax plans will leave “some winners and some losers,” according to Philip A. Marra, the U.S. real estate funds leader for KPMG. Trump’s policies might also impact the strength of the dollar. That could, in turn, have a negative effect on capital flows to U.S. real estate from foreign investors, making it more expensive to invest stateside, but less expensive for U.S. investors to invest abroad, he says.
Marra is also seeing mounting interest in infrastructure investing and requests for advice on how to structure infrastructure funds. “Trump’s plan for investing in infrastructure has increased real estate players’ interest in infrastructure,” he says. “Depending upon the nature of the infrastructure, these assets could fit into core/core plus fund, and investors are hoping there will be more opportunities for PPP type investment if government increases its spending on infrastructure.”
Changes in property values this year, whether they trend up or down, will be moderate from a macro market perspective, according to Marra. If pricing remains strong, an additional 25 basis points increase in interest rates should not cause major dislocation in the market.
A majority of survey respondents view the real estate market favorably in 2017, but say deals are hard to find, according to KPMG.
- About 77 percent say the U.S. economy will be same or better in 2017 than 2016.
- Roughly 76 percent say real estate fundamentals in their primary markets will be the same or better in mid-2017.
- Improving real estate fundamentals will be the biggest driver of business growth according to 52 percent of those polled.
- Fifty six percent of respondents say they can find high quality properties, but these don’t deliver desired yields.
- Twenty seven percent say their companies will invest in core class-A product this year.
Respondents appear confident in the strength of their markets and U.S. commercial real estate as a whole, but see macroeconomic issues (and inability to find investments that can deliver desired returns) as threats to their business growth in 2017. As a result, many organizations are looking to scale back on risky strategies and are underwriting lower yields, KPMG asserts, but they are by no means slowing investment.
Real estate executives are also beginning to embrace new technologies to streamline their businesses. Nevertheless, cyber threats and disruption only account for 10 percent of their worries. “Commercial real estate is a little bit behind on the curve when it comes to this,” according to Marra.
- Fifty percent of respondents view macroeconomic dynamics as the biggest threat to their business.
- Another 50 percent cite the difficulty of finding investments with sufficient returns as the biggest issue they face in 2017.
- Approximately 16 percent are worried about inability of securing equity capital.
- Another 13 percent worry about new legislation.
- And 11 percent cite “geopolitical uncertainty” as a business threat this year.
On the technology front:
- Thirty percent of firms surveyed experienced a cybersecurity event within the last 24 months.
- Half of survey participants do not feel they are adequately protected against a cyber attack.
- And 58 percent plan to implement technologies to address cost and operational inefficiencies.
Capital availability is expected to grow in 2017. This year will mark high growth in the open-ended fund and debt fund space, KPMG anticipates.
- Nearly 86 percent characterized their access to debt financing for real estate as the same or better in 2017.
- Ninety one percent say their access to equity capital will be the same or better in 2017.
Among tips to “sustain the boom,” KPMG advises commercial real estate firms to maintain a robust compliance program, strengthen cybersecurity capabilities, diversify talent and grow networks of private lenders to improve financing prospects. “Real estate developers should consider private lenders as a potential source of financing, as they may be more willing to meet capital needs, especially funding for riskier projects and to less-established borrowers,” the firm says in its report.
The survey was administered online and included responses from 64 participants. The respondents included C-class executives at commercial real estate firms (36 percent); CEOs, presidents and managing partners (34 percent); executive vice presidents and managing directors (13 percent) and senior vice presidents and directors (11 percent). Six percent of respondents identified themselves as “other.”