RCA Insights

Did US Investors Lean Towards Risk in 2016?

By on February 15th, 2017

Coauthored by Ravi Govada.

U.S. investors at the beginning of 2016 expected to see a shift in risk-taking last year. The move to risk can take two forms – either market tier risk or investment style risk – and investor sentiment in ULI’s Emerging Trends in Real Estate 2016 anticipated both “greater movement to secondary markets” and “greater attention to value-add assets”.

As noted in the last issue of US Capital Trends, there was a preference for core deals in 2016 and a key driver was growth in secondary markets. With much of that core deal growth in secondary markets attributable to several large asset sales, we asked: When we cut through the noise of megadeals, is there evidence of a shift in market and investment style risk in 2016?

For this analysis we looked at single assets under $100m. The trends in single assets are important because they are the foundation of market activity: each deal transacts based on its own merits unlike portfolio and entity-level transactions, where the need to deploy capital quickly can sometimes drive activity.

To understand the move along the investment style risk spectrum we aggregated the sales volume of development sites and properties intended for redevelopment as Development Related. This Development Related category is higher risk compared to renovation, which we classified as Value Add.

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Single asset sales under $100m reveal stronger growth in core deals across all three market tiers. Secondary markets posted the strongest YOY growth of 12%, with tertiary markets logging 5% growth and 6 Major Metros (6MM) 2%.

Value Add transaction activity fell across the market tiers, but the decline was shallowest for the 6MM at -7%; Value Add activity in secondary and tertiary markets fell by 16% and 17%, respectively.  Development Related transaction volume also fell across the board, but secondary markets fell by the least, at -9%.

Our analysis reveals that the expressed preference of investors at the start of 2016 was only halfway true in practice with regard to single assets worth under $100m. Investors did lean to secondary markets in 2016, but the move to riskier Development Related and Value Add investment styles did not transpire.

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.