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Principal Real Estate Investors’ Strategy for Commercial Real Estate

Posted on Monday, January 12th, 2015 at 7:04 am    

A prominent institutional real estate manager in the U.S. has released its strategy for commercial real estate. This annual strategy outlook report provides a detailed insight into the key themes that are expected to be responsible for driving the commercial real estate market of the United States in 2015. The details also include continued monetary policy and stronger economic growth.

Report Details:

A few areas of interest that will benefit commercial real estate investors in the year 2015 include the following:

‘Extra Innings’ Entry for Capital Markets- In the coming year the commercial real estate investors will be able to make the most of capital market’s ‘extra innings’ with the yield curve growing flatter in support of current cap rates, even as the Treasury yield curve’s long end remains bound in some way or the other. Also, if the space market fundamentals happen to remain strong, the cap rates must also stay stabilized or modestly compress according to the type of property/market (as and where applicable). It is also necessary for commercial real estate’s risk-premia expectations to remain stable.

Four Quadrant Strategy Highly Recommended- Underneath the base case economic scenario of the investor, its four quadrant strategy has been designed to be modestly biased towards subordinate debt (that is focused on those markets that are still in early recovery stages) and value-add private real estate equity (that is focused on those job growth markets that are stronger), giving proxy for ‘growth’. When the investor refers to property type, it is actually favoring industrial and office as well as high-end or luxury oriented retail for delivering above-average net operating ‘income growth’. The core real estate that is moderately leveraged also needs to perform well even as the upward pressure on low interest rates and cap rates is limited.

Defensive and Offensive Moves by Investors- Commercial real estate investors should aim at increasing the same-store rent growth, despite the fact that the capital market environment is more favorable. Only then can the investors make profit from the improving economic conditions, or protect themselves in case the cap rates rise, reducing drawdown in value.

Conclusion:

Finally, the report ends with this note: “After nearly five years since the end of the global financial crisis, the U.S. economy appears to be heading towards a modest period of escape velocity growth in 2015. The winding down of quantitative easing by the Fed also suggests its growing comfort with the economic outlook. For real estate investors this likely means that a remarkable period of central bank aided performance is coming to an end, with the baton of growth transferring from the capital markets to the space markets. The timing for such a transition could work out well, with demand firming and expected to accelerate across most property types, and a capital market environment that is still expected to remain supportive”.

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