As COVID-19 has reset the economic cycle, the 2021 Investors Intentions Survey from CBRE finds that investors are seeking higher returns.
While most core or core-plus investors expect their unlevered target returns to fall slightly or stay the same, those further out on the yield curve anticipate gains. Almost one-third of investors that are targeting distressed assets expect their returns to jump two percentage points, according to CBRE. Another 45% of these investors said their return expectations will remain the same.
Even opportunistic and value-add investors expect better returns. The return expectation of risk-averse investors fell due to a couple of significant factors, according to CBRE. More than 30% of respondents said that intense competition for assets was pushing down returns. Another 20% said uncertainty around the length of the pandemic drove down returns. Around 20% said the cost of capital was contributing to adjusted returns. Roughly 15% of respondents said lack of appropriately priced inventory contributed to low returns, and other 15% said limited NOI growth affected returns.
With the Fed keeping interest rates low and inflation drifting to above 2%, the low cost of capital is contributing to this increased competition. While inflation is a current concern, it needs to be tracked, according to CBRE.
To achieve strong returns, investors are being pushed further out the risk spectrum. The number of investors chasing opportunistic and distressed jumped from 16% in 2020 to 29% in 2021. Interestingly, the share of investors seeking core assets also increased, which CBRE attributes to rebound in the gateway markets and a flight to quality. Overall, 25% of respondents favored core plus, while 17% preferred core
US-based investors seem particularly aggressive. CBRE attributes that to a stable economic environment and a belief that capital will remain abundant amidst solid competition for assets. With the stimulus stabilizing values, distressed investments will be harder to find.
Even though some still expect to see more distressed deals by the end of the year, the reality will likely be a shallow pool of distressed sales.
“I think that we thought we would see something more cataclysmic than we have in certain respects,” Manny Grillo, a restructuring partner at Baker Botts, told GlobeSt.com. “That doesn’t mean that there haven’t been a number of properties that haven’t needed to be restructured, but a lot of what has occurred in the marketplace to this point has been the amend-and-extend variety rather than full-scale restructurings.”