CRE Investors Grow Bold About Risk

NEW YORK CITY—It has been clear for some time that commercial real estate investors have been seeking opportunities in secondary and tertiary markets as gateway markets become too expensive. What hasn't been clear, until the 2014 Commercial Real Estate Outlook Survey by KPMG, released this morning, was the extent of this exodus from these "safe" markets.

"Last year the percentage of investors interested in class A, primary markets was around 48%," Greg Williams, National Leader of KPMG's Real Estate practice, tells GlobeSt.com. "This year it is only 25%. "

"We expected to see a decline but didn't expect it to be that significant of a drop," he says.

Investors, though, are willing to take on the risk of these smaller markets and the due diligence that accompanies such investments, Williams concludes.

That 23 percentage point differential is just one of the findings of the report, but it is a telling one. In general KPMG's survey paints a picture of a more confident commercial real estate community—and one that is increasingly willing to spend capital. Of the 100 senior commercial real estate executives surveyed, 68% expect to increase capital spending in 2014, up from 60% in 2013.

And the markets where they feel they will get the best return? They are in the Southeast—among the hardest hit by the recession but now recovering the fastest. Some 48% cited this part of the country, up from 28% last year.

Another sign that CRE executives are feeling good about the sector's prospects: more investors are eying initial public offerings this year. The number of respondents considering an IPO doubled from 8% in 2013 to 16% this year. Here, Williams points to the success non-traded REITs have had in accessing the public markets as well as the growing number of non-traditional companies seeking REIT status. In fact, he says, he is surprised the percentage of respondents considering IPOs is not higher and believes it would have been if the survey had been taken later in the year.

To be sure, respondents do have concerns about the sector. When asked about the biggest threat to their business models, 32% indicated the speed and magnitude of the economic recovery as their top concern, followed by lack of job growth (30%), inability to find investments delivering sufficient returns (23%) and the impact of new regulations/legislation (22%).

In last year's survey the largest number of respondents, 40%, cited political and regulatory uncertainty as their top concern.