Global Investors to Move From U.S. Office to Residential Says AFIRE

Not to bash office — again — and AFIRE’s latest compilation of its members’ opinion isn’t delivered with a mean and disparaging overtone. But in a way it’s worse, because it’s a cold calculation by people who need to put large sums of money, on the order of $3 trillion AUM, to work profitably.

Overall, the respondents exhibited a lot of uncertainty, “but institutional investors, who benefit from a long-term horizon, see opportunity to realign their portfolios to meet the shift in asset class demands — especially towards the continued need for a greater volume of residential properties in U.S. cities,” they wrote.

To start, 24% expect overall real estate allocations to increase globally and 35% expect for them to increase in the U.S., while another 35% think they will stay the same here.

One might wonder whether the general optimism represents how the respondents really felt because, globally, 22% expected a net increase in their own portfolios, with 45% expecting things to stay the same. Look at the U.S. and 20% expect their own portfolios to have a net increase in real estate allocations, with 38% planning to stay where they are.

Expectations don’t necessarily match to eventual actions, however. “Respondents were asked to weigh their forecasted real estate investment allocations for 2023 against their actual deployment through the year,” they wrote. “One in three respondents initially expected to increase U.S. investment in 2023, though only one in five met this goal.” A previous AFIRE survey suggested that a quarter of non-U.S.-based investors planned a decrease in their U.S. portfolios, while 36% of U.S.-based investors said the same. However, 51% of non-U.S.-based investors have decreased their U.S. portfolio allocations compared to 31% for U.S.-based investors.” There was a lot of consensus about problems facing the U.S. office market, as 93% expected Class-B property to drop in value, 73% said that Class-A would also lose value, and 47% thought trophy and Class-A+ offices would also fall in value.

“Specifically, investors expect slightly less value lost in gateway market central business districts (CBDs), with 71% forecasting a decrease, compared to 85% forecasting the same decrease in secondary market CBDs, which previously saw an uptick in valuation and investor attention through the pandemic era,” they wrote.

And the investors don’t see a tiny loss of valuation. Of the respondents, 64% expected trophy and Class-A+ properties to lose upwards of 10% of their value, with another 26% saying 11% to 20%. That only seems moderate compared to the other classes: for Class A, 36% said up to 10% loss, 44% expected 11% to 20%, and 15% said 21% to 30%. For Class B, 31% still said up to 10% loss, but 29% said 21% to 30% drop, 17% said 31% to 40%, and 8% went as far as 41% to 50%.