JP Morgan picks its best CRE categories for investing
JP Morgan sees a range of sectors in the United States that are benefiting from strong user demand and will do well in 2022, according to its 4th annual Global Alternatives Outlook report.
The report is based on the opinions of CEOs, CIOs and strategists at JP Morgan’s more than $200 billion alternative platform. It provides a 12-18 month perspective on the trends influencing their respective markets, as well as their most promising investment ideas and thoughts on underestimated risks investors may face.
Logistics, multi-family, outdoor industrial storage top the list
Logistics properties (especially infill logistics assets in the so-called last mile between urban storage facilities and consumers); suburban multifamily and single-family housing in the Sunbelt states; campus-like clusters (or nodes) of amenity-rich offices for the technology sector; and outdoor industrial storage facilities (including bus stations, parking lots, and equipment storage) in key urban locations are expected to thrive.
Further into 2022, JP Morgan believes that “contrarian investment opportunities in the struggling corporate and retail sub-sectors may begin to emerge,” according to the report. “Office rental markets are expected to recover slowly, potentially creating refinancing issues for asset owners. If the decline in asset values exceeds the intrinsic development costs associated with these properties, opportunistic investments in offices could become very attractive.”
Although contrarian plays are already apparent in retail, this sector is very different, says the JP Morgan report.
“Maintaining the focus on quality is essential. Our case for highly selective retail investing has been validated, somewhat paradoxically, by the pandemic: retail assets in prime locations that have benefited from large capital investments are booming, while poor quality fail. The chasm between the two seems destined to widen in the coming months.
Core US Real Estate in ‘Sweet Spot’
Economic growth and inflation are creating a “sweet spot” for basic real estate in the United States, according to the report.
“Economic growth prospects remain strong while the cost of capital is still cheap,” JP Morgan said. “Historically low interest rates and rising inflation are currently supporting asset class valuations. Investors should be careful, however, as these favorable conditions may not last.”
According to the report, cash flow-generating assets are expected to become increasingly expensive in 2022 as the real estate market becomes more crowded.
“Since the onset of the economic recovery in late 2020, we have seen unprecedented fundraising by unlisted private real estate investment trusts (REITs) and an acceleration of institutional portfolio rebalancing, which still lags the value spikes in equity and fixed income portfolios,” JP Morgan said. “As investors come under increasing pressure to find yield-producing assets, we expect to see capital flows to the ‘real estate rise sharply.’
At the same time, long-term megatrends, such as the growing popularity of e-commerce transactions and, in the United States, population migration to Sunbelt states, continue to drive demand for real estate assets from niche, according to the report.