Investor Zeitgeist

Grubb & Ellis recently conducted a survey of its commercial real estate investment clients to determine their views on the market.

• The economic mood turned darker over the past 11 months. In a similar survey conducted last November, 38 percent of respondents expected “job growth strong enough to reduce the unemployment rate” to return in 2011 – the most popular answer. In the survey just concluded, 43 percent said this will be delayed until 2012.
• We asked investors which type of “-flation” most concerned them. In the earlier survey, respondents were split evenly in their concern over inflation and deflation, each of which garnered 38 percent of the votes. In the recent survey, stagflation ran away with 53 percent of the responses followed by deflation with 30 percent and inflation a distant third with 17 percent. This reflects a fear that the U.S. could be slipping into a “lost decade,” the label applied to Japan’s economic malaise in the 1990s.
• Two other questions tapped the vein of economic angst among investors. From a list of eight potential drags on the investment market, just under half of the respondents viewed a stalling recovery as the biggest threat. Government actions and tax reform scored a distant second. In another question related to the economy, 48 percent of respondents do not anticipate a double-dip recession, but 41 percent said the Great Recession “never really ended.” Thus investors are skeptical of the recent declaration by the National Bureau of Economic Research that the Great Recession ended in June 2009.
• The interest rate outlook of the respondents is even more pessimistic than the forecasts from mainstream economists. Respondents say the yield on the 10-year Treasury will increase 50 basis points by the end of next year, which would put it around 3 percent – about 50 basis points below the outlook from economists. This is very low historically and emblematic of an agonizingly slow recovery.
• In terms of investment volume, respondents say that 2004 is the new normal. Properties valued at $223 billion traded hands that year according to Real Capital Analytics. By comparison, the peak of the market in 2007 brought transactions valued at $507 billion while a decade-low $54 billion traded last year. Through the first eight months of this year, just under $55 billion-worth of properties have traded. Although year-to-date investment volume is up substantially from the same period last year, it remains well short of the new normal, i.e. a level of equilibrium between buyers and sellers.
• The pessimistic tone of the economic responses coexists with signs of optimism for the investment market. Eighty-one percent of the respondents view themselves as net buyers in the next 12 months. While core properties attracted the most enthusiasm, value-add and opportunistic investment strategies were the second and third most popular responses, a clear sign that the intense competition for core assets is pushing investors to take more risk.
• Slightly more than half of the respondents said that apartments are their top choice for a “safe, secure investment” in core property. Industrial was a distant second.
• Who are the biggest competitors vying for properties? Respondents say that private equity and private and non-traded REITs have the cash and are driving the engine down the track.

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