Conformist, Contrarian or Vintage: Investment Strategies for Today’s Uncertain Market

Industrial & Logistics

Despite the expectation of slower occupier demand this year, U.S. industrial & logistics real estate is expected to perform well, particularly in the Sun Belt.

The most attractive opportunities are in well-known logistics hubs that continue to see strong demand, solid rent growth and low vacancy, such as Miami and Orlando. Markets with port infrastructure, such as Charleston and Northern New Jersey, offer opportunities too. Investors should also consider assets in other markets with strong historical performance and well-established inventory, including Chicago, Inland Empire and Los Angeles.

Other investment opportunities include last-mile logistics facilities in big cities with large consumer bases and a strong big-box retail presence, such as Los Angeles and Phoenix.

Figure 1: Top U.S. industrial investment markets

Source: CBRE Research, Q1 2023.

Multifamily

We expect multifamily volumes to be down throughout most of 2023. Still, tailwinds—especially the relatively high cost of home ownership at present—will continue to provide a favorable outlook over the medium-term. Additionally, while we anticipate fundamentals will be impacted by a recession, given these tailwinds, many markets will be somewhat insulated from recessionary impacts.

Major and high-growth multifamily markets with low vacancy rates will present the most attractive investments opportunities. These generally are Sun Belt markets with continued population and employment growth, such as Nashville, San Diego, Charlotte and Orlando.

Figure 2: Top U.S. multifamily investment markets

Source: CBRE Research, Q1 2023.

Life Science

Life sciences job growth and real estate demand will remain strong, despite the sector’s dependence on capital markets, which have become markedly more constrained.

The top life sciences research clusters of Boston/Cambridge, San Diego and San Francisco offer the most attractive investment opportunities due to their strong talent base, nearby research universities and venture capital availability. The Northeast Corridor markets of New York, New Jersey and Washington, D.C. also present good opportunities thanks to the size of their talent pools and presence of leading universities.

Demand for life sciences real estate will remain healthy in large Sun Belt markets, such as Atlanta, Miami and Houston, primarily due to talent attraction and venture capital funding, and in emerging markets like Salt Lake City, Nashville and New Haven, CT.

Figure 3: Top U.S. life science investment markets

Source: CBRE Research, Q1 2023.

Hotels

Although highly sensitive to market cycles, the hotel sector continues to benefit from pent-up demand coming out of the pandemic. This trend is amplified by inbound international travelers—led by China and Japan. These travelers tend to visit west coast markets such as Las Vegas, San Diego, Los Angeles and Hawaii. There is also minimal new hotel construction.

Select and limited-service hotel fundamentals are strong, with particularly compelling opportunities in leisure-focused markets with RevPAR well above 2019 levels, such as Savannah, Miami and Phoenix.

Figure 4: 2022 U.S. hotel RevPAR as a percentage of 2019

Source: CBRE Hotels Research, CBRE EA, Kalibri Labs, Q1 2023.

Retail

The retail real estate sector continues to benefit from strong consumer spending, rising rents and minimal new construction that has kept vacancy rates relatively low. Though we do expect some impacts to fundamentals as the economy weakens, retail assets in high-growth markets and live-work-play districts, particularly in the Sun Belt, offer the best investment opportunities.

High-growth markets like Raleigh, Nashville and Salt Lake City also present good opportunities due to their sizeable talent clusters, high employment growth and robust population growth.

Figure 5: Top U.S. retail investment markets

Source: CBRE Research, CBRE Econometric Advisors, MSCI Real Assets, RSMeans, Q1 2023.

Industrial & Multifamily

Although industrial and multifamily assets are expected to perform relatively well even in a weaker economy, rising interest rates and more conservative lending standards are a meaningful headwind. As a result, some investors may want to lock in profits in these sectors by selling assets that have appreciated considerably.

CBRE posits that even with a hypothetical 15% drop in industrial capital values from their peak in 2022, sales of industrial assets in key U.S. markets would still provide investors who acquired them in years prior with substantial profits. To illustrate this, we used a hypothetical sale of an industrial asset acquired in Q1 2016.

Figure 6: Change in industrial capital values since Q1 2016, comparing actual value growth (light green) with a hypothetical 15% drop in values (dark green)

Source: NCREIF, CBRE Research, Q1 2023.

Similar trends, although less pronounced, are also apparent in the multifamily sector. Strong capital value growth in Sun Belt markets, including Atlanta, Miami and Los Angeles, enable investors to exit with handsome profits, even if asset values declines reach 15%.

Some large gateway markets are possible exceptions to this trend since values didn’t increase as much in those markets.

Figure 7: Change in multifamily capital values since Q1 2016, comparing actual value growth (light green) with a hypothetical 15% drop in values (dark green)

Source: NCREIF, CBRE Research, Q1 2023.

Identify value discrepancy between public and private markets

Price dislocation between the public and private markets could offer opportunities, particularly with REITs and other listed vehicles trading below their net asset value (NAV). While U.S. REITs have bounced back in recent months, they remain off highs, with many still trading under their NAV.

Figure 8: U.S. REIT Index by Sectors (Jan. 2021 = 100)

Source: CBRE Research, Wilshire Associates Incorporated, May 2023.

U.S. banking sector stress has shined a spotlight on commercial real estate debt. Although CBRE’s analysis does not indicate commercial real estate debt will endanger the U.S. financial system’s health, we do see conditions that will reduce the flow of credit into the sector.

As a result of financial market volatility, we have observed opportunities to finance properties with challenges accessing debt capital through traditional channels. This includes assets in the range of $30 to $50 million values. This size is too large for small banks and too small for many debt funds’ consideration. There are assets within this value range that have strong fundamentals and rental growth prospects, particularly in the industrial and multifamily sectors. As a result, we believe these areas will present compelling investment opportunities.

The U.S. real estate industry at-large is experiencing property value declines due to rapid rate hikes and a softening economic outlook. This will create funding gaps as investors are forced to refinance at a lower LTV ratio or when value has fallen since origination. CBRE’s Econometric Advisors studied this issue and estimates the funding gap for senior commercial real estate loans has reached $72.5 billion. Most of this will be concentrated in the office sector, where values have taken the greatest hit. We expect further significant distress in the office sector, but investors will seek to fill the funding gap for high-quality assets. This will increase demand for mezzanine debt and opportunities for fast-moving lenders. We also anticipate some opportunities for equity investors as asset owners seek to fill funding gaps.

Past economic downturns have shown the window to acquire solid assets at a discount is somewhat brief. Buyers should move swiftly to capitalize on pricing discounts, since top-quality properties are the most resilient during economic downturns. The optimal period to purchase prime assets following the Great Financial Crisis lasted roughly six to 12 months, according to CBRE’s analysis. Investors who purchased properties during this period enjoyed attractive returns, as the market recovered, and cap rates compressed.

CBRE believes the opportune moment for U.S. acquisitions will be in H2 2023, when we expect a moderate recession.

Figure 9: New York—CRE Investments Pre- & Post-GFC US$500m+ (2005-2015)

Source: MSCI Real Assets, CBRE Research.
Note: Size of bubbles denote transaction volume of deal at point of sale.