KPMG’s 2016 Real Estate Industry Outlook Survey reflects the viewpoints of senior executives in the United States. Investors are becoming more risk-averse and are beginning to “de-risk” by decamping to traditional safe havens, like the United States, and by opting for lower-risk opportunities. However, the massive inflow of foreign capital has led to a significant competition for the best investments.
Investors have been optimistic about the U.S. real estate market, and that looks to continue into 2016 and possibly beyond. Capital is flowing into the United States and the economy is growing, bringing knock-on effects that make real estate a good investment. And that was before the recent interest rate rise and tax changes that will only accelerate these trends. At the same time, however, investors are becoming more cautious about future prospects. They are becoming less aggressive in their risk-taking and more uncertain as to how the market will look when they exit these investments
several years down the line.
KPMG LLP surveyed senior commercial real estate executives in the United States to better understand sentiments in the marketplace as well as to address market challenges and opportunities:
- Cautious optimism: There is continued but cautious optimism in the real estate market, as GDP and job growth lend themselves to the positive view. Additionally, rising geopolitical and economic risk worldwide contribute to uncertainty and increased investor interest in U.S. markets.
- Investors are beginning to “de-risk:” Investors’ growing caution can be seen in efforts to “de-risk” portfolios, as investors are concerned about the longevity of the current expansion cycle. They are becoming less aggressive in taking risks and are taking measures to adjust their portfolios in preparation for the flattening or downturn ahead.
- More capital than opportunities: Executives see a market in which the available capital far exceeds the opportunities to put it to use. This has driven up prices in primary markets and forced investors to look elsewhere. A substantial inflow of foreign capital into the United States, a primary cause of this capital surplus, is not expected to slow, and the recently passed reform to the Foreign Investment in Real Property Tax Act (FIRPTA) will only increase this imbalance.
- Hunt for yield: With little room for cap-rate compression left, many investors are focusing even more attention on real estate fundamentals and are looking for incremental returns in the form of yields instead of depending on market movements to profit on transactions. Investors are using easy access to equity and debt in the “hunt for yield” in a variety of assets and markets.
- Growing cyber concerns: The real estate industry may not be sufficiently prepared to prevent or mitigate cyber security threats as many respondents indicate they haven’t taken significant steps to prepare for a breach, including creating a written cyber incident response plan or other concrete actions. This is especially true for smaller firms.