According to the latest survey from AFIRE, the association for international real estate investors focused on commercial, foreign institutional investors are adapting to market headwinds as they struggle with increasing inflation and climbing interest rates in the US.
Gunnar Branson, the organization’s CEO, says in an examination of its most recent AFIRE International Investor Survey Summer 2022 Pulse, investors “all are fully aware of the current market issues.” The investors know, for instance, that US inflation has increased by more than 9% since January 2022; the Fed increased interest rates more than it has in nearly thirty years; we passed the six million COVID death mark globally; supply chains are still in disarray; and July 2022 was the 451st consecutive month with temperatures above the twentieth-century average. Countries all across the world have suffered from wildfires; some regions’ water supplies are at dangerously low levels, while others are under water as a result of unprecedented flooding. Of course, Russia also sparked a conflict in Ukraine.
Investors with and without US-based bases foresee difficulties in closing deals in both the US and, to a greater extent, in Europe due to economic uncertainties. Foreign investors are less bullish about both regions than in prior surveys, but they are more positive about the US than Europe. Branson notes that, in contrast to overseas investors (67%), Americans (92%) are more gloomy about the “inevitability” of a US recession.
Branson notes that 86% of respondents said inflation this year has actually been worse than expected, while 60% of respondents are observing an increase in cap rates and a flattening of institutional demand, and that “questions asked about inflation six months ago generate different answers when asked in July.” Additionally, respondents predict that this year there will be fewer funding available for development, refinancing, and acquisitions “across the board,” with debt for development predicted to experience the greatest fall. To make matters worse, more than three-quarters of those surveyed think that the US will experience a recession within the coming 12 months.
Though the rising cost of financing is having an impact on new cross-border ventures, Branson adds that it “may also encourage cross-border activity in new regions and markets.” Roughly 77% of respondents think that, if it occurs, the recession won’t be as bad as it was in the 1970s. This will result in improved ESG processes, special opportunities in strategic and specialty sectors, and a sharper focus on multifamily, single-family, and affordable housing.
Another top goal for survey respondents was energy independence, and over two-thirds said they are currently actively working to increase their energy efficiency. Eighty-two percent of respondents to the study think that the need for investors to address an ESG agenda will increase as a result of the global energy crisis. Additionally, 59% of investors give priority to projects that have previously earned certain sustainability certifications, such as LEED and BREEAM.
In contrast to US-based investors (31%), who place a higher premium on getting rid of outdated or inefficient assets, non-US investors (43%) are more inclined to focus on capital spending for sustainability improvements.
