JP Morgan Picks Its Best CRE Categories For Investment

JP Morgan sees an array of sectors in the US that are benefiting from high user demand and will perform well in 2022, according to its 4th annual Global Alternatives Outlook.

The report is based on the opinions of CEOs, CIOs and strategists from J.P. Morgan’s $200 billion-plus alternatives platform. It provides a 12- to 18-month perspective on the trends influencing their respective markets, as well as their most promising investment ideas and their thoughts on the underappreciated risks investors may face.

Logistics, Multifamily, Outdoor Industrial Storage Top the List

Logistics properties (particularly infill logistics assets in the so-called last mile between urban storage facilities and consumers); suburban multi-family and single-family housing in Sunbelt states; campus-like clusters (or nodes) of amenity-rich offices for the technology sector; and industrial outdoor storage facilities (including truck terminals, parking and equipment storage) in key urban locations, are set to flourish. 

Deeper into 2022, JP Morgan believes that “contrarian investment opportunities in stressed corporate and retail subsectors may start to emerge,” according to the report. “Leasing markets for offices are likely to recover slowly, potentially creating refinancing challenges for asset owners. If declines in asset values overshoot the intrinsic development costs associated with these properties, opportunistic investments in offices may become highly attractive.”

Although contrarian plays are already apparent in retail, this sector is very different, JP Morgan’s report stated.

“Maintaining a focus on quality is essential. Our argument for highly selective retail investing has been validated, somewhat paradoxically, by the pandemic: Retail assets in top locations that have benefited from significant capital investment are thriving, while poor-quality assets are failing. The chasm between the two appears destined to grow wider in the months ahead.

Core US Real Estate in ‘Sweet Spot’

Economic growth and inflation create a “sweet spot” for core real estate in the US, the report said.

“The outlook for economic growth remains strong while the cost of capital is still cheap,” JP Morgan stated. “Historically low interest rates and rising inflation are currently supportive of asset class valuations. Investors need to take heed, however, because these favorable conditions may not last.”

Cash flow-generating assets are likely to become increasingly expensive in 2022 as the real estate market becomes more crowded, according to the report.

“Since the economic recovery began in late 2020, we have seen unprecedented fundraising by non-traded private real estate investment trusts (REITs) and an acceleration of institutional portfolio rebalancing, which always lags behind spikes in the value of equity and fixed income portfolios,” JP Morgan said. “As investors come under increasing pressure to find yield-producing assets, we expect to see capital flows into real estate increase sharply.”

At the same time, long-term megatrends, such as the surging popularity of e-commerce transactions and, in the US, population migration to Sunbelt states, continue to drive demand for niche real estate assets, according to the report.