The Azucena Take: Investor Confidence and the Commercial Real Estate Market 2022 (Pt 2)
Twice a year; Marcus & Millichap partners with Wealth Management Real Estate to conduct the Investment Sentiment Survey. This is to get an understanding of how confident investors were about the market and what their concerns were. The second survey, the 2H 2022 Investment Sentiment Survey, was conducted in early August. This is to get an understanding of investor confidence now compared to early 2022.
The results show that investor confidence has somewhat dropped but that is due to the changing market. While not as high compared to early this year, it is still higher than the average. This also doesn't mean investors are panicking or fear a recession is on the horizon.
Thus it helps to break down the results.
Current Investor Sentiment
According to the 2H 2022 Investment Sentiment Survey, investor confidence is at 159 BPS, an 11-point drop compared to what it was early in the year. However, it's higher than what it was during the pandemic or the years prior.
Driving this sentiment are a number of factors that concern investors. Here is a look at how many interviewed thought this was their biggest concern.
Rising Interest Rates: 71%
Rising Inflation: 59%
Rising Operation Expense: 47%
Availability of Finance: 46%
State of the Economy: 43%
Rising interest rates and inflation may be a top concern, but it has hardly had an impact on the overall market. Breaking down the numbers will present a different perspective.
Investor Strategies in Late 2022
Despite concerns about rising interest rates, most investors don't plan on changing their strategy in 2022. On the buy side; 65% of investors don't plan to change their strategy. 9% stated they will buy more investments in 2022 while 27% are thinking of scaling back. On the sell side; 77% of investors don't plan to change their strategy. 11% stated they will sell more investments in 2022 while 12% are thinking of holding off on selling.
The same sentiment can be seen regarding the impact of inflation. On the buy side; 64% of investors don't plan to change their strategy. 12% stated they will buy more investments in 2022 while 24% are thinking of scaling back. Rising inflation has made apartments, hotels, and self-storage properties more desirable by 14%.
Investors are expecting high returns on their properties despite the current market conditions. 52% expect cap rates* to go up while only 27% expect them to drop in the next 12 months.
What it Means for Investors?
If you have been sitting on the sideline and worrying about interest rates and inflation, someone else has been making moves. The takeaway should be that even though things may look bleak, you can't let fear get in the way. Yes, there is uncertainty but the future is always unwritten.
* Capitalization Rate (or cap rate) is used by brokers and investors to estimate the expected rate of return that is generated by an investment property. This is calculated by taking the net operating income (NOI) and dividing it by the value of the property.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap