The results of an annual survey on commercial real estate investment say investors remain positive about the market, in spite of market turbulence, the economy and political headwinds.
The National Real Estate Investor magazine and Marcus & Millichap Real Estate Investment Services conducted its annual Investor Sentiment Survey in October, and the results just tabulated for the third quarter of 2011 match those in 2006.
The latest results show only a slight decline in investor sentiment from second quarter 2011, the highest level since the survey started in 2004.
"Much like the economic data that we have seen come out over the past month, the survey data shows a pretty high degree of resilience," says Hessam Nadji, a senior vice president and managing director at Marcus & Millichap in Calabasas, Calif.
"There is no sense of panic reflected in the economic data or this survey," adds Nadji.
The survey found that 30 percent of those replying strongly agreed with this statement: "Commercial real estate offers favorable returns relative to other investment classes."
Approximately 20 percent strongly agreed with the statement, "We have an abundance of capital ready to invest."
On the other side, 71 percent of the responders disagreed with this statement: "It would be better to invest in the stock market given the recent correction."
Only 8 percent agreed that it would be better to invest in the stock market. The rest had no opinion.
The survey summary noted that job growth in the third quarter of 2011 beat expectations, with 241,000 private sector jobs added in September and October.
Retail sales, excluding auto and gas, also beat Q3 expectations with a year-over-year increase of 6.1 percent in October, according to the U.S. Department of Commerce.
"Collectively, what this is showing us is that the economy is not growing very fast, but there is confidence and reconfirmation that both the economy and commercial real estate have regained solid footing," says Nadji.
Opinions are split on whether commercial real estate prices have hit bottom or still have further erosion ahead. Overall, 45 percent of respondents believe values have not yet hit bottom, while 38 percent agree that values have reached their low point. The remaining 17 percent are either on the fence or have no answer.
Respondents were slightly more optimistic on occupancies, with 42 percent stating that commercial property occupancies have hit bottom.
Apartments continued to distance themselves from the rest of the commercial real estate pack, the survey said, well ahead of hotels, mixed-use, industrial, retail and office, respectively.
Apartments have benefited from drivers that are unique to the sector, including a decline in home ownership and strong renter demographics.
The net absorption of apartments during the third quarter totaled 37,223 units, which helped to drop vacancies to 5.6 percent — a 1.5 percent improvement compared to third quarter 2010. Rents rose 2.4 percent to an average of $975, according to Marcus & Millichap.
Overall, 63 percent of apartment investors believe now is the time to buy more. An even larger percentage, 68 percent, expects apartment values to increase over the next 12 months.
U.S. retail vacancies have improved a slight 20 basis points over the past year to reach 10 percent as of the third quarter.
At the same time, effective rents have slipped a further 0.2 percent to average $15.91 per square foot, according to Marcus & Millichap.
Industrial and office owners are slightly more pessimistic in their views of these property types compared to the second quarter survey. More than half of industrial owners, 56 percent, expect industrial values to remain the same over the next 12 months, with 34 percent anticipating an increase and 9 percent predicting a further decline.
That response is more positive compared to a year ago when 29 percent of respondents expected values to rise.
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Even modest levels of growth will be enough to continue the improvement in occupancies across all property types, but we're still in for a slow recovery.
"We added 1.8 million private sector jobs in the past year," Nadji reported. "That is the key reason occupancies have stabilized and are beginning to improve."
Invitations to participate in the survey were emailed in October to public and private investors and developers of commercial real estate.
Recipients of the survey included Marcus & Millichap clients as well as subscribers of National Real Estate Investor and Retail Traffic selected from commercial real estate investor, pension fund and developer business subscribers who provided their email addresses.
The majority of respondents are: private investors, 36 percent; developers, 17 percent; and private partnerships, 16 percent. They have an average of $40.4 million invested.