Investors and lenders are starting to take a more conservative look at the market. According to the 2020 RCM LightBox Investor Sentiment Report shows that lenders are tightening loan-to-value ratios and underwriting standards, and investors are will use more caution on pricing this year. This trend is coming on the heels of active investment years.
“No one wants to see the end of what has been one of the most dynamic market cycles in our lifetime. However, investors have to take a long-term view to protect their positions,” Tina Lichens, COO RCM LightBox, tells GlobeSt.com. “Depending on their investment horizons, they may be looking at a 5 to 10-year hold period, during which they need to be realistic about rent growth and other factors that impact how the asset performs. This means that many are looking ahead to years three, four and five and thinking about what how the market will be performing.”
In looking ahead, commercial real estate players are determining how assets would survive a downturn. “If the market takes a dip, can they ride out any fluctuations? Historically, they say we run in decade-long cycles. In certain situations, and for certain sectors, we’ve entered foreign territory,” says Lichens. “No one wants to be ill-prepared.”
The current political climate is also making both investors and lenders more cautious. “Elections and other geopolitical events simply give investors time to pause. Investors like certainty and predictability,” Lichens. “If certainty and predictability are threatened, many investors will become more cautious and conservative, until the threat subsides or is eliminated.”
While the market is showing caution, no one is actually predicting a downturn or recession any time soon. In fact, most players remain confident in the current market fundamentals. “Investors are preparing for a slowing of the market, as is predictable at this stage in the cycle, but they aren’t expecting turmoil,” says Lichens. “There is no indication of significant interest rate increases or that the financial markets will weaken, unless there is a significant domestic or international event.”
China is the most likely candidate for such an event, along with the upcoming election in November. “Certainly, the eyes of the world are on China and the potential long-term impact the coronavirus could have globally—as well as the ongoing trade wars that have significantly impacted many sectors,” says Lichens. “And, in the US, investors will watch very closely what happens on the election front. There will likely be a pause before the election, as has happened historically, and then a reemergence as investors have some clarity on government policies after November. At that point, investors will be in a better position to act from a position of relative strength and certainty.”