Several positive findings were also revealed by the second half survey, notably that investors still have ample access to capital, a healthy appetite to increase holdings in the coming year and confidence that interest rates are likely to remain low in the near term. The number of respondents who say they have abundant capital to spend dropped back only slightly from 63 percent in the first half survey to 58 percent in the second half survey. “Many investors have dry powder and are well positioned to capitalize on the market. We should see that come into play in the fourth quarter,” says Tony Solomon, senior vice president, national director of Marcus & Millichap Capital Corp.
More than half of survey respondents (54 percent) said they plan to increase their commercial real estate holdings over the next 12 months. Although that is a step back compared to the 63 percent who expected to increase investments prior to the outbreak of the pandemic, it still represents a high level of confidence given the uncertainty surrounding the economic recovery. Thirty seven percent anticipate no change to holdings, while 9 percent said they are likely to decrease holdings in the coming year [Figure 5]. The average increase expected is 11 percent, which is fairly consistent with previous surveys. Cash flow was rated as the primary real estate investment priority by half of survey respondents, followed at a distance by asset appreciation at 27 percent.
“People continue to believe in real estate and the long-term nature of this asset class,” says Alan L. Pontius, senior vice president, national director of the Office & Industrial divisions of Marcus & Millichap. There has been a lot of uncertainty in the past six months and questions about what is around the next corner. “However, when you look a year or two years or five years ahead, a lot of that uncertainty goes away, because the root of our headwinds stem from the COVID-19 health crisis, and that will – hopefully – be a relatively short-term phenomenon,” he says. Once some sort of medical solution is in place, business will recover, which is a key factor supporting investor confidence in real estate. They are looking beyond the short-term turbulence and seeing the longer-term demand drivers, he adds.
As the survey indicates, numerous investors have adopted a hold strategy. On the other hand, many investors are focusing on the attractive yield premium cap rates now offer compared to the cost of capital, notes Solomon. Interest rates have held steady at or near a record low, with the 10-year Treasury as of September hovering in the 70 basis point range. Similar to the first half survey, more than half of respondents (54 percent) anticipate no change in interest rates versus 39 percent who were expecting rates to increase, and 7 percent said rates could decline [Figure 6] . Only 17 percent of respondents believe the 10-year treasury will go negative in 2020.
The low rate environment has also spurred increased refi activity. Half (50 percent) plan to refinance at least some if not all of their real estate in 2020 due to the impact from the coronavirus and falling interest rates, while the other half had not changed their plans related to financing [Figure 7]. Yet despite those low rates, investors’ ability to access capital depends on the individual situation. “A couple years ago, virtually any property could be financed within a relatively tight band,” says Solomon. “Right now, there is much more variance depending on the location, type of property and borrower strength.”