Sourcing Investment Opportunities That Go Beyond the Headlines

Investors should look beyond headlines to find CRE opportunities over the five-year horizon, according to one industry watcher.

“So much depends on each investors’ strategy, risk tolerance, knowledge, experience, capital, and geographic focus,” says Marcus & Millichap’s John Chang. But six key property types pose opportunities for growth for the savvy investor: you just have to know where to look.

Multifamily, which has been on a record tear since the pandemic, saw fundamentals retreat somewhat over the course of 2022, with vacancy ticking up 190 basis points to 4.5% and rent growth slowing. Chang says that trend will likely continue — but says the long-term housing shortage should still bolster demand over the next five years.

“Because the cost of homeownership surged, apartment rentals have become even more cost effective housing options. on a macro level, that will sustain multifamily investments over the five-year horizon,” he notes.

As for retail, ”when you look at its performance, even during the pandemic, you’ll see the myth that’s been perpetuated,” Chang says. Neighborhood and community retail has held up well in particular, with multi tenant retail vacancy rates in the upper 5% range, roughly where they were pre-COVID. Average rents are also up 10% over 2019 levels. Supply risks are limited as well as new construction has been limited over the last decade.

“Given the cap rates that retail trades at, the property type remain well positioned for the five-year outlook,” he says, adding that single tenant net lease remaining a popular option for investors using a 1031 exchange.

“The key ingredients have been the strength of the tenant, the length and term of the lease, and the property location,” Chang says. “More but not all of the single tenant property leases also include inflation escalators which makes them more appealing than they used to be.”

Medical office is also a favorite, with long leases running in general more than 10 years in duration. The outlook is supported by the strong aging baby boomer population, which is aging into their 60s, 70s, and 80s, Chang says.

And “on somewhat of a different trajectory, traditional office properties are entering 2023 with a COVID hangover,” Chang says.  A majority of the office-using workforce continues to work from home, at least part time, but Chang says investors need to look below the surface.

“Downtown office space in Class A buildings have been most impacted by this trend, while suburban office in Class B and C properties have generally outperformed expectations,” he says. “Investors who think long term and who are willing make a counter-bet have the potential to capitalize on the soft office investment climate.”

Industrial properties also remain a favorite among investors. The outlook in some markets is clouded by the record 400 million sf of space slated to come online this year, but development remains highly concentrated among 10 metros, according to Marcus & Millichap data.