If the US real estate cycle is to stay on track into 2018, it will do so on the backs of four sectors: CRE debt, logistics, retail and alternatives. That’s according to new research from TH Real Estate.
According to Melissa Reagen, managing director, head of research, Americas at TH Real Estate, factors such as economic growth indicate that the real estate cycle will last several more years in the US, and that slowing rent and appreciation growth are evidence of a maturing real estate market.
“However, real estate fundamentals remain solid with supply and demand largely in balance,” Reagen said. “We think that CRE debt, logistics, retail and alternatives specifically, will continue to outperform other sectors in 2018.”
“Investors are increasingly diversifying into sectors with sustainable demand drivers that provide both stability and growth in the short and longer term,” John Philipchuck, director of research and strategy, Americas. “Alternative real estate sectors, which are underpinned by demographic growth and human need, offer superior consistency throughout the economic cycle.”
The research finds that, given the abundant lending opportunities available, the new year could be an opportune time to add CRE debt to a real estate equity or multi-asset portfolio. Depending on the allocation of equities and fixed income instruments, CRE debt can enhance multi asset portfolio performance due to its modest correlation and higher risk-adjusted returns, relative to most other asset classes.
TH Real Estate believes the logistics sector will outperform its peers in 2018 as healthy market conditions and continued e-commerce sales growth support higher rents and capital values. The rise in online shopping is helping to feed this growth as e-commerce sales have generated an additional 30 to 40 percent of warehouse demand, according to Green Street Advisors.
That e-commerce growth by no means indicates the death of bricks-and-mortar stores. Landlords are responding to the shifting retail landscape by repurposing their assets. Other owners recognize the opportunity to recycle some retail centers by turning them into multifamily residential, office, healthcare, self-storage or even industrial uses. Additionally, some retail assets present a compelling buying opportunity such as power centers, lifestyle centers, neighborhood/community centers, grocery anchored centers, urban retail and malls.
Investor appetite for alternative real estate sectors has been growing for years, introducing self-storage, student and senior housing, medical office and other niche sectors into many institutional portfolios. Historical resiliency in periods of economic instability combined with favorable demographic trends support further growth in 2018 and beyond.
Source: RE Journals