In the third quarter of 2016, financial markets remained unfazed by the Brexit vote that took place at the end of the second quarter. As investors attempted to come to terms with a muted reaction to Brexit, limited volatility continued to be the norm, with recurrent concerns regarding global monetary policy, OPEC, the FOMC rate decision and the U.S. election reemerging in the quarter's latter half. Despite resulting bumpiness, the severity of its velocity was muted, especially when compared to the prior 12 months. The moderated pace of recent volatility is paralleling a reversion of investor sentiment to that from the spring of 2015, increasing cautious optimism. With strong, sustained liquidity in commercial real estate debt and equity markets, this ‘resetting’ of investor sentiment positions the markets well for stable growth heading into 2017.
While investor sentiment is stabilizing and volume declines moderating, selectivity remains the norm across investor types, sectors and markets with an increased focus on downside risk mitigation and cycle assurance. This is impacting liquidity for higher-risk submarkets and higher-priced, core opportunities in select sectors and markets. As we move into 2017, pricing will be a key factor to watch, especially in historically less-liquid segments of markets. As long as sector fundamentals remain strong, we expect any near-term softening of cap rates to remain subdued.
Despite declining fundraising, the liquidity landscape is strong and evolving across debt and equity markets, favoring debt funds and higher-yielding equity strategies. This is due in part to the amount of dry powder sitting on the sidelines. Dry powder remains at a record $239 billion globally with 57.3 percent focused on North America. This represents an increasingly disproportional focus on North America, primarily the U.S., with this percentage now at the highest level seen since 2004. Looking ahead, as investors adopt latter cycle strategies, debt fundraising is expected to remain strong, filling the financing gap at lower-risk positions in the capital stack amidst regulatory-pressures on traditional lenders.
For more detail on the above and other investment trends, read the full Investment Outlook or see the below snapshots of investment activity by asset type.
Total volumes for 2016 on pace to set second largest tally since 2008.
JLL expects the U.S. as a whole to sustain positive RevPAR growth, notwithstanding the recent trend of softening performance in some gateway markets. Increases in hotel cap rates should remain subdued. More M&A activity is expected throughout the sector.
The multifamily sector remains resilient, supported by job growth, sustained rental gains spurred by positive absorption, balanced housing starts and overall investor appetite for secondary markets.
Single asset transactions and rebounding sale leaseback volumes drive net lease momentum up in third quarter as enhanced product availability increases investor interest.
Nationally, the overall pricing landscape for office product remains steady, with cap rates across primary and secondary markets averaging 4.4 percent.
Long-awaited investment opportunities, including Trophy urban and mall assets, are finally coming to market at the tail end of 2016.
Group Head, Americas Capital Markets and Investor Services
Director, Investor Research