Results from the first-half 2022 WMRE/Marcus & Millichap Investor Sentiment Survey are overwhelmingly positive. The Investor Sentiment Index climbed five points from 165 in the H2 survey to reach 170 – the highest level since 2015 [Figure 1].
A number of factors are driving optimism across all sectors of the commercial real estate market. Vacancy rates for apartments, industrial and self-storage are at or near record lows. For other property types that have faced challenges during COVID-19, the outlook in a post-pandemic cycle is turning an important corner. “Vaccination levels are rising and society in general is feeling more confident in the ability to live with COVID-19,” says John Chang, Senior Vice President and National Director of Research and Advisory Services at Marcus & Millichap. “As a result, other property types that aren’t already at record levels, such as retail and hotels, see upside on the horizon as people get out and travel and go to entertainment venues, restaurants and stores.”
The country is also moving toward some resolution of what return-to-office plans might look like. Although hybrid work models are still evolving, there is an expectation that companies will increasingly return to the office in the near future. Therefore, demand for office space should deliver gains, adds Chang. “The positive movement in the index reflects all of those dimensions – the positive trends that are already here in some property types and the momentum that is coming in the future in other sectors,” he says.
Investor confidence is reflected in the record high transaction volume that occurred in 2021. Commercial and multifamily sales topped $846 billion last year, significantly higher than the pre-pandemic total of the $600 billion in 2019, according to Real Capital Analytics. Survey results show a healthy appetite to continue acquiring assets in the near term. More than half of survey respondents (54 percent) said they plan to buy property in the next 12 months, a slight uptick compared to 50 percent who planned to increase holdings in the second-half 2021 survey. Relatively few (6 percent) expect a decrease. The typical respondent plans to increase real estate investments by an average 12 percent, which also climbed higher compared to the 9 percent increase anticipated in the second-half 2021 survey.
“The amount of capital coming into commercial real estate is higher than it has ever been as evidenced by the transaction volume of 2021,” says Evan Denner, Executive Vice President and Head of Business at Marcus & Millichap Capital Corp. Consistent with WMRE/Marcus & Millichap surveys over the past several years, a majority of respondents (61 percent) continue to have an abundance of capital ready to invest. Additionally, a majority of respondents (71 percent) believe commercial real estate offers favorable returns to other investment classes. However, that view is slightly below the first-half 2020 survey, where 74 percent thought commercial real estate offered favorable returns relative to other investment classes. That slight decline could be a reflection of cap rate compression over the past two years, particularly in high-demand sectors such as multifamily, industrial and self-storage, notes Denner.