Spoiler alert: Real estate investors might be edging into riskier strategies in 2014.
Other trends predicted for the new year include that multifamily properties might fall off of investors' must-have lists, construction investment could pick up and foreign investors are expected to continue to scoop up trophy properties in the U.S.
“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.
Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”
As for the real estate markets, Jim Sullivan, managing director, REIT research, of Green Street Advisors Inc., a Newport Beach, Calif.-based research firm, said real estate market projects are “tied at the hip with any investor's view of interest rates.”
One camp's view is that interest rates might go up because the economy will be recovering at a robust pace, Mr. Sullivan explained.
“A higher cost of capital is bad for real estate investing but a robust economy is great for real estate,” he said. Another view is that if interest rates go up unaccompanied by strong economic growth, it will be bad for real estate because it is an industry that is capital intensive, Mr. Sullivan said.