Property fundamental have helped abate recent pessimism about the U.S. economy, but gradually declining market conditions are expected to weigh on the asset class during the next 12 months, according to RCLCO Real Estate Advisors’ Mid-Year 2019 Sentiment Survey Results, which indicates the RCLCO Current Real Estate Market Sentiment Index (RMI) has decreased since mid-year 2018 from 68.0 to 49.2, but is up from the RMI of 37.5 six months ago.
Survey respondents believe most property types are solidly in the “late stable” phase of the real estate cycle, with all but retail pulling back from the cycle peak compared with the firm’s year-end 2018 sentiments. Industrial, age-restricted/AAC and seniors/CCRC assets are on the border of the “early stable” and “late stable” phases.
In the current report, only 12 percent of survey participants believe a real estate downturn has already begun or will begin this year, while those thinking 2020 or later (31 percent) and 2021 or later (57 percent) represent the vast majority of respondents. The perceived timing on a property market downturn was more evenly split six month ago.
“After flirting with inversion during the early part of the year, the yield curve has maintained an inverted form over recent weeks, hinting that there is risk of a recession within the near-to-medium term,” states the report. When a recession does come, real estate will take a hit, but not to the extent it did during the Great Recession, notes the survey. When the time comes, absorption may not be able to keep up with multifamily and industrial starts, and office and retail assets may be challenged in retaining occupancy levels as demand needs change.
But RCLCO expects opportunities to arise in the next downturn, and says it’s important for investors to maintain some “dry powder” for opportunistic plays, and keep a level head in the interim.
“Real estate investors should underwrite with realistic assumptions about future income and expense escalations, and test for downside protection and make sure they are comfortable with the results.”
