NEW YORK, NY—Given a theoretical investment budget of $1 billion, commercial real estate executives say the industrial sector is their preferred asset type for investment in 2018, as part of a survey of CRE executive confidence conducted by Altus Group.
Altus Group’s 2018 Altus Group Real Confidence Executive Survey also suggests that CRE executives are concerned about the impact of natural disasters on the US economy in 2018.
“Natural disasters came in at 46 percent,” says Charles DiRocco, director of research at Altus Group, who spoke in an exclusive video interview with GlobeSt.com NJ editor Steve Lubetkin right after the conclusion of the State of the Union speech by President Trump Tuesday night.
The executive survey polled industry leading CRE decision-makers on economic trends, demographics, consumer preferences, and the supply and demand of commercial real estate assets. Executives were also asked to allocate a theoretical $1 billion worth of capital in CRE investments to get the best returns for 2018. The Altus Group Real Confidence Executive Survey index is based on these allocations and represents a total theoretical investment of $52 billion of capital.
The investment preference for industrial is driven by the consistent growth in e-commerce and the need for more industrial warehousing and distribution space, Altus says. Industrial assets received the highest allocation among executives participating in the survey, with 33.2 percent invested in industrial within the private equity selections and 30.5 percent in equity REITs suggesting, “strong confidence that the industrial market is the asset class to watch in 2018.”
This year’s survey index allocation saw 42.1 percent of the total capital allocated to direct real estate investments or private equity, followed by 25.3 percent to REIT opportunities. On the debt side, private debt received a 22.4 percent distribution while public debt received 10.3 percent. Private debt financing increased 10.9 percent over last year, and interest in public debt increased 43 percent over 2017.
“That was our second year in a row that industrial was on top,” says Charles DiRocco, director of research at Altus Group, who spoke in an exclusive video interview with GlobeSt.com NJ editor Steve Lubetkin right after the conclusion of the State of the Union speech by President Trump Tuesday night. “E-commerce is really pushing the industrial demand, but there is the unfortunate, and that’s the retail side of the equation, where we lost almost 7,000 major store closings in 2017.”
The survey results also suggest the strength of the healthcare sector in 2018. Executives allocated 16.9 percent to equity healthcare REITs and 14.6 percent in seniors living private equity investment. As the large baby boomer demographic ages, the need and demand for healthcare increases, and retail space is likely to be redeveloped to accommodate changing demographics like baby boomer demand for increased health services, he says.
“We are going to see some of that medical space move into that live-work-play atmosphere in the urban environments,” DiRocco says.
Watch the video interview with Charles DiRocco in the player below:
“There is an increasing appetite for ‘right now’ shipping options meaning e-commerce retailers will need to invest in more industrial spaces to meet the demand,” says Richard Kalvoda, senior executive vice president at Altus Group. Thirty-two percent of CRE executives surveyed expect that by 2020, e-commerce sales will represent more than 14 percent of total retail sales.
The survey also reveals that CRE executives believe natural disasters – such as floods, earthquakes, and hurricanes – could potentially have the greatest impact on the US economy in 2018. Forty-six percent (46 percent) of respondents believe that natural disasters are a larger economic concern than geopolitical conflicts and terrorism.
Other key highlights from the 2018 Altus Group Real Confidence Executive Survey include:
Economy: Overall, CRE executives are moderately confident in the strength of the US and global economies. However, their responses clearly indicate trust that there’s more room for the global economy to grow, with an increase of 28.2 percent over 2017 compared to a 0.5 percent increase for the US
Tax Reform: With recent passage of the reformed tax code, the CRE industry expects to see an influx in spending and investment. However, executives indicated relatively low confidence in President Trump’s ability to exceed last year’s productivity in 2018. Even with a low mean score, participants’ responses were scattered with about half believing in Trump’s ability to deliver on his stated objectives.
Infrastructure: Allocations to the infrastructure sector decreased from 15.5 percent in 2017 to 7.3 percent in 2018, “likely driven by the administration’s lack of action on promises for major infrastructure investments,” says Kalvoda.
Development: CRE executives are not anticipating an increase in development spending in 2018, however, the sectors they forecast will have the most development in 2018 are industrial and multifamily, tied at 42.9 percent in this year’s survey.
Office: A majority of CRE executives are confident that redesigns of office space will incorporate more open concept layouts, however, 59 percent believe that this layout does not lead to greater productivity and efficiency in the workplace.
A full listing of the portfolio and survey results are available at www.realconfidence.com/executive-hub/.