Hodes Weill’s 2020 Market Commentary
Roaring into the 20’s
As we welcome in a New Year, we are back once again with our Annual Market Commentary — Top Ten Market Observations. 2020 also marks the beginning of a new decade – and our second decade in business at Hodes Weill & Associates.
As we prepare to go to print on our 11th Annual Market Commentary, we are struck by the remarkable sameness of the message from the past several years. Once again, despite conflicting market signals, geopolitical tensions, and yet another year of increasing valuations, global investors are staying the course and continuing to deploy substantial volumes of capital into real estate assets. Moreover, investor sentiment for the asset class has been trending upward after several years of declines, as reported in our 2019 Institutional Real Estate Allocations Monitor. Capital continues to target a broad range of asset types, geographies, risk strategies, and investment structures. The past year saw large inflows of capital into real estate private funds, and as in years past, much of this new fund capital was committed to a handful of the largest real estate fund managers. There is still caution in the air, as we wait for a shoe to drop that will signal the end of one of the longest economic and real estate market expansions in history. That said, while we are skeptical, we note that we are beginning to hear from industry experts why this economic cycle may last longer, with reference to Australia’s 27 straight years of positive economic growth.
During the past year, investors showed continued enthusiasm for new asset types that benefit from either strong demographic trends or the real estate requirements of the “new economy.” Alternative real estate categories are quickly becoming a regular part of the “basic food groups” though where and how investors invest in these new sectors vary widely. Multifamily and logistics assets continue to command the strongest capital inflows, consistent with investors’ focus on predictable and sustainable cash flows. Multifamily returned to the institutional “buy list” as concerns about excess supply of Class A CBD product abated with strong absorption and decent rent growth. As institutional interest tends to cycle, we wonder what will be the next strategy or sector to return to favor. It is notable that PREA’s recently published 2020 Investment Intentions Survey stated that “office is the most popular sector for 2020 investment, followed by residential and industrial.”2 Given macro trends, investors will remain reluctant to pursue hotel and retail assets generally, though many opportunistic investors are finding interesting opportunities in these sectors. The flow of capital into real estate debt continues unabated, and the lending markets are open and competitive.
So, what has changed in the past year?