Investor Sentiment is Mixed Heading into 2021

Heading into 2021, CRE investor sentiment is strong—depending on the asset class. According to the Allen Matkins/ UCLA Anderson Forecast biannual commercial real estate survey, investors are optimistic on multifamily and industrial product, but for retail and office, the outlook is dreary.

Industrial fundamentals have held steady through the pandemic, and investor sentiment has reflected the strong dynamics, which are driven by ecommerce activity and a permanent change in household purchasing triggered by the pandemic. Participants in the survey were optimistic about the industrial market over the next three years. About 30% of participants said that they are now looking to increase exposure to industrial product this year.

The sentiment response also reflects investment activity this year. Industrial was the clear winner during the pandemic. The market had positive net absorption for the 40^th consecutive quarter, and effective rents continued to grow throughout the year. This activity not only drove strong optimism in the market but also investment activity, which surged at the end of the year. Several major investors made substantial investment purchases at the end of 2020, including KKR, Allianz Real Estate and Rexford Industrial Realty.

Multifamily is a similar story, but opinions varied among geographic markets. Compared to the June 2020 survey, optimism improved for some California metros, including Silicon Valley, Orange County and San Diego. California’s largest metros San Francisco and Los Angeles had no improvement in optimism, due to a combination of rapidly declining rental rates and a migration trend out of major metros. For other markets surveyed, investor sentiment was unchanged, meaning that participants did not expect a material change in rents or occupancy for apartments through 2023.

Sentiment was pessimistic for office and retail product. Responding to uncertainty of future office usage, panelists are unenthusiastic about investment returns on properties purchased today. Participants also predicted that office supply will outpace demand, at least in the near term. Overall, participants are taking a wait-and-see approach, according to the survey.

Finally, retail had the most negative outlook among the panelists. The pandemic has once again fundamentally disrupted the retail market. The pandemic has forced consumers into their home, hampering brick-and-mortar shopping, and widespread job loss has reduced the spending and savings capacity of consumers. This has created a challenging environment for retail investment. Investor sentiment reflected the change with participants in the survey predicting lower returns in 2023 compared to the end of 2020. Participants also expected reduced retail construction and potential conversion of existing properties into other uses.