Trepp | CRE Investors Start Dancing Like No One’s Watching

You can argue that commercial real estate investors have become bullish. That’s a good thing if you’re in the deal-making business.

The signs are everywhere. Transaction activity, involving both property sales and lending, has increased, driven in large part by the greater liquidity in the market. Loan spreads—the risk premiums that lenders apply in order to come up with coupons—have tightened and a greater number of lenders, including banks, are now competing for the best loans.

Cementing that thinking is the latest Fear and Greed Index by John Burns Research and Consulting LLC, in conjunction with CRE Daily, which received 459 responses to its quarterly survey last month.

The headline Fear and Greed Index number was 58. Any number more than 55 indicates expansion, while numbers less than 45 imply a contraction. The latest reading is the highest it’s been in two years. The Investment Strategy Index, meanwhile, had an index value of 57, indicating investors had increased their investments in real estate. In fact, 25% of respondents said they had increased their investments in the fourth quarter.

The expectation index, while still in Greed category at 63, slipped from the third quarter’s 66 value, with 12% of respondents saying they would decrease their exposure to real estate in the coming six months.

That Greed indicator was reported across all major property types, with retail holding the highest reading at 61 and office the lowest at 53. Still, survey respondents said they would increase their exposure to all of the major property types.

Respondents noted that values for apartment properties declined by roughly 5% during the last year, while office values declined by 6%. They expect apartment values to decline marginally this year, but values for all other property types should increase.

The bullishness arguably is most vivid in investors’ expectations for growth in net operating income. More than a quarter said they were underwriting office NOI to increase by more than 3% annually, while 19% were underwriting their deals to a growth of 2-3% annually. Across the board, investors said they were projecting NOI growth of better than 2% annually. For instance, 63% of those pursuing industrial investments said so, as did 53% of those pursuing apartment properties. And just more than half of those pursuing retail properties were penciling in similar growth expectations.

But relatively few expect exit capitalization rates to change much. Half of multifamily investors expect them to remain unchanged, while 47% of those in the industrial sector expect the same, as do 48% of those in retail and 47% of those in the office sector.

Note: This is an excerpt from Trepp’s CRE Rundown, the complete CRE Rundown can be accessed here.?

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