Heading into its twelfth year, the U.S. economic expansion has maintained solid momentum. A strong macro environment and healthy property fundamentals have supported U.S. privately-held commercial real estate investment performance. The ongoing rise in occupancies, rents and asset values has continued to offer attractive risk-adjusted returns.
Institutional investor allocations to the asset class have continued to increase. Average target allocations to the real estate asset class increased 10 basis points (bps) to 10.5% in 2019, up approximately 160 bps since 2013.1 Investment sales momentum has been very strong year to date, after a near peak level in 2018, and we expect a strong year ahead in 2020 given the resilience of the U.S. expansion. U.S. transaction volume reached $579 billion, the highest level so far in this expansion (just below the 2007 peak).2
Figure 1: Real Estate as a % of Institutional Investor Current & Target Allocations
Most key demand indicators have remained positive; however, growth has varied significantly by region, industry, and property sector. Going into 2020, influential investment themes include the omni-channel consumer, affordable housing, generational demographics, tech clusters, and functional obsolescence.
As such, Clarion Partners sees the most compelling ongoing opportunities in industrial and multi-family, as well as a few alternative or specialty niche sectors – such as medical office, life sciences/labs, self-storage, senior housing, student housing, and entertainment/sports.
Going forward, key issues to watch are:
- E-commerce climbing to almost 50% of all GAFO retail sales;3
- The continued and rapid rise in housing prices;
- Faster job growth in tech-influenced U.S. cities (e.g. Seattle, Austin, the San Francisco Bay area, and Boston);
- The shift by both aging Millennials and Baby Boomers to both low-tax and less costly areas (e.g. the suburbs and Texas, Florida, Arizona, and North/South Carolina);
- Higher construction costs largely due to labor shortages, which have impacted the pace of new development.
Clarion Partners’ outlook for 2020 is cautiously optimistic. U.S. consumer spending remains strong, buoyed by a tight labor market and record-high stock market. The Federal Reserve is on an easing path, having lowered interest rates three times in 2019 and injected $250 billion of liquidity into the repo market. Low interest rates have led to historically high asset values and ongoing appreciation (excluding retail) at a time when top markets abound with capital. We believe that U.S. commercial real estate will continue to be a source of steady current income over the next year.
2 Real Capital Analytics. Q3 2019.
3 U.S. Census Bureau. Q3 2019. Note: GAFO = General merchandise stores, Clothing and clothing accessories stores, Furniture and home furnishings stores, Electronics and appliance stores, Sporting goods, hobby, book, and music stores, and Office supplies, stationery, and gift stores.
Growth in the Slow Lane
Consumers Hold the Key
Looking Beyond the U.S.
Shifting the Global Balance
Uncertainty on the Horizon
How Infrastructure Is Evolving
Royce Investment Partners
Positive Signs for Small-Caps
Resilient Growth, Despite Risks
Risk-adjusted return is a measure of performance relative to its level of risk exposure over a given period of time.
One basis point (bps) equals one one-hundredth (0.01) of one percentage point).
Preqin is a source of data, insights and tools for alternative asset professionals.
GAFO, or General Merchandise, Apparel and Accessories, Furniture and Other Sales (retail sales categories) represents sales at stores that sell merchandise normally sold in department stores.
The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The repo market refers to the market for short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
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