NEW YORK CITY—Nutrition science has identified “superfoods” and so, apparently, has commercial real estate. It’s the term that TH Real Estate uses to describe CRE debt, one of four sectors the firm believes could provide opportunities for investors in 2018.
“Commercial real estate debt enhances portfolio performance due to its modest correlation and higher risk-adjusted returns, relative to most other asset classes,” according to TH Real Estate’s Think US Cities: 2018 Outlook report. “We believe it is the superfood every portfolio should consider adding.”
TH Real Estate sees now as an opportunistic time to add CRE debt to a real estate equity or multi-asset portfolio, “given the abundance of lending opportunities available. We also believe that adding commercial mortgages to a real estate equity or multi-asset portfolio during the later stages of the real estate cycle can enhance performance by 20-50-plus basis points.”
Furthermore, “elevated real estate transaction volumes and commercial mortgage loan maturities suggest the pipeline for mortgage originations will remain strong for the next several years,” the report states. CRE debt maturities are expected to average $360 billion between 2017 and 2020, virtually identical to the 2011-2016 average. And while transaction volumes for the next several years will fall below 2015 and 2016 levels, they will remain elevated from a historical perspective.
Along with debt, TH Real Estate also sees opportunities in logistics, retail and alternatives. “Solid real estate fundamentals and economic growth suggest the US real estate cycle will last several more years,” says Melissa Reagen, managing director and Americas head of research. “The US real estate market is in its mature phase as characterized by slowing rent and appreciation growth. However, real estate fundamentals remain solid with supply and demand largely in balance. We think that CRE debt, logistics, retail and alternatives specifically, will continue to outperform other sectors in ‘18.”
The firm believes the logistics sector will outperform its peers this year, thanks to healthy market conditions and continued e-commerce sales growth supporting higher rents and capital values. Its cites Green Street Advisors data showing that e-commerce sales have boosted warehouse demand by 30% to 40%.
Logistics’ winner status is widely known; arguably more surprising is the viability of retail as an investment opportunity. Yet brick-and-mortar stores are far from dead; they’re simply playing a different role in the sales process than before.
Accordingly, TH Real Estate notes that landlords are responding to this transformation by repurposing and re-tenanting their assets. Other owners are recognizing the opportunity to recycle some retail centers by turning them into multifamily residential, office, health care, self-storage and even industrial.
“We believe there are compelling buying opportunities for high-performing power centers, lifestyle centers, neighborhood/community centers, grocery anchored centers, urban retail and malls,” the report states. “We expect high-performing, experiential retail properties will continue to thrive in the coming decades, while average-and-low performing retail centers will either die a slow death or be repurposed.”
TH Real Estate says that investor appetite for alternative real estate sectors has been growing for years, bringing sectors like self-storage, student and seniors housing and medical office into many institutional portfolios. “We expect further growth in these sectors in 2018, especially given the mature stage of the economic cycle,” according to the Think US Cities report.
“Investors are increasingly diversifying into sectors with sustainable demand drivers that provide both stability and growth in the short and longer term,” says John Philipchuck, director of research and strategy, Americas. “Alternative real estate sectors, which are underpinned by demographic growth and human need, offer superior consistency throughout the economic cycle.”