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A focus on value and risk shaping investor behavior United States | Investment outlook | JLL | H1 2017

More sector-focused insights below:

Office :: Industrial :: Multifamily :: Retail :: Net Lease

It's all in the numbers... the United States first half breakdown:

Continued uncertainty, selectivity and the changing nature of transactions are impacting volumes in the first half of 2017

While domestic and offshore capital remains active, activity declined 13.6 percent at midyear

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M; portfolio, entity-level transactions)

Office

Office dynamics are in line with the broader market: An 11.9% decline at midyear paralleled a pullback in large, single-asset transactions across primary and secondary markets. With high barriers to entry and decreased transactions in the urban cores of the primary markets, groups continue to find opportunities in secondary markets, notably in the Sun Belt. A focus on value add will continue to drive office investment through year-end.

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Industrial

The industrial sector is up 20.7% at midyear, a key factor being the reemergence of large-scale portfolios with $3.5 billion of portfolios, over $250 million already closed this year. An additional $12.5 billion of comparably sized transactions are expected to close by year-end.

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Multifamily

On the heels of three record years of activity, the multifamily sector is seeing activity decline, down 22.3% at midyear. Sentiment remains optimistic for the multifamily sector in the mid- to long term. However, the softening of rent growth across more markets and peak cycle deliveries in urban cores are encouraging suburban- and value-add-centric investment. This has spurred a near 60.0% decline in high-rise transactions year-to-date.

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Retail

The question of tenancy risk continues to impact retail dynamics and liquidity. While this risk continues to impact Tier 2 malls and power centers, it is beginning to creep into grocery-anchored assets amid fears of online disruption. This paralleled a 31.1% decline in grocery-anchored transactions at midyear. Well-located, grocery-anchored centers with strong tenants like Whole Foods or Trader Joe’s continue to price aggressively. The retail sector at-large is down 18.7%.

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Net Lease

As pricing and opportunities have started to plateau for the overall sectors, varied sources of capital are increasing their focus on the net lease sector. This has sustained momentum, with volumes stable and cap rates maintaining compression. A continued strong appetite from foreign and institutional investors is providing buoyancy for sales volumes, driving 11 opportunities greater than $250 million to close year-to-date. Comparatively, there were 16 during full-year 2016.

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Asian capital remains active and is increasingly driving U.S. cross-border acquisitions

Foreign investment more concentrated in 2017, reflective of selectivity and discipline

In aggregate, Asian, Canadian and German capital are driving 83.8 percent of year-to-date activity.

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M; includes portfolio, entity-level transactions)

Looking forward, we expect foreign investment to keep pace with the broader market at current cycle norms. As targeted opportunities remain limited and pricing elevated in primary markets, foreign capital will continue to explore investments outside the office sector and primary markets. However, selectivity will remain the norm given the risk profiles of these groups and the limited familiarity with non-coastal markets.

U.S. remains the highest recipient of cross-border capital, but activity is behind 2016’s pace

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M; includes portfolio, entity-level transactions)

Value add strategies leading fundraising with potential to reach 2007 peak this year

In the first half of 2017, fundraising of closed-end funds reached $31.9 billion, a slight decline from comparable figures in 2016, which reached $33.0 billion. Despite overall fundraising being down 3.1 percent, dry powder continues to increase and now sits at $254 billion.

Value add fundraising on pace to have best year since 2014 and possibly 2007

Source: JLL Research, Preqin

Overall fundraising remains healthy and is expected to remain in line with recent years, having averaged $70.1 billion since 2013. Debt funds will continue to raise more capital as balance sheet lenders are forced to pull back and tighten lending standards. However, value add fundraising is expected to be the headline of the year, with the potential to surpass record levels set in 2007. This fundraising will continue to increase already elevated levels of dry powder. In the current competitive environment for these profiles of equity and debt investments, these factors will further cement deployment pressures and force managers to rethink strategies, while maintaining strong liquidity for those targeted opportunities.

Elevated fundraising for debt funds will remain and will likely eclipse 2014’s record year

Source: JLL Research, Preqin

Real estate debt markets remain liquid. Alternative lenders continue to challenge traditional players, sustaining competition late in the cycle.

Despite concerns from the OCC and continued dialogue on commercial banks’ need to curtail lending, bank CRE lending has not stopped. Small domestically chartered commercial banks remain more active. With banks, life company originations remain elevated with record commitment levels in the first quarter of the year. This is expected to drive stable if not increased activity in 2017, with leverage levels remaining fairly stable and cautious.

As we get closer to the tail end of the real estate cycle, debt funds have emerged and become competitive as alternative lenders. After coming off a historic year of fundraising in 2016, 2017 is proving to be no different. Closed-end debt funds raised $7.9 billion in the first half of 2017, a 6.5% increase year over year and the most raised since 2014.

Banks and life companies have dominated, while alternative lenders incrementally grow

As CMBS declines, banks and life companies average 6.0 percent growth in 2016; however, CMBS is rebounding in 2017.

Source: JLL Research, Mortgage Bankers Association

Small commercial banks continue to lead bank originations, up 9.0 percent year-to-date for the third consecutive year

Source: JLL Research, Federal Reserve (as of Q2 2017)
Sean Coghlan | Director, Investor Research | sean.coghlan@am.jll.com
Sean Kane | Manager, Investor Research | sean.kane@am.jll.com

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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