It’s a Rich Man’s World

Demand for U.S. commercial real estate assets from High Net Worth Individuals (HNWI)—those with more than $1 million in liquid assets—rose in 2016 to $10.3 billion, marking the highest level seen since 2013.

The HNWI real estate market comprises approximately 2%[1] of the total U.S. CRE investment volumes.

HNWI U.S. Commercial Real Estate Sales Volume

Multifamily recorded the highest investment volumes in 2016 ($3.5 billion) replacing retail which was the most favored sector in 2015 ($3.2 billion). Looking ahead to 2017, 37% of the 113 private individual/ family office (HNW) respondents to the CBRE Americas Investor Intentions Survey 2017 cited a continued preference for multifamily. This was followed closely by industrial (33% of respondents).  Retail and office came in third at 12%, respectively.

69% of the HNW respondents to the Americas Investor Intentions Survey 2017 intend to increase purchasing activity in 2017. Nearly half (46%) expect to keep allocations at the same level while another 36% expected to increase allocations. In terms of amounts, 86% plan to invest up to $500 million into U.S. CRE assets in 2017.

The wealthy are just like the rest of the world in that they too want their money to work hard for them. Most (70% of respondents) cite overall returns (both capital appreciation and income returns) and yield relative to other asset classes as the main motivators for investing in CRE. The risk tolerance of this group is also about the same or lower than it was in 2016 with only 9% having a higher risk tolerance.

The top metros for investment by this group are the gateway markets. However, Atlanta was ranked No. 1 for this group reflecting the strong multifamily market in the city. New York, also ranks prominently.

Top U.S. Metros for Investment in 2017

In terms of threats, 30% of respondents are concerned that property is overpriced and a bubble waiting to burst. Nearly a quarter (24%)  worry about occupier demand being affected by global and local economic shocks, while another 17% cite overbuilding leading to excess supply as a threat. Rising interest rates are also an area of concern for 16%.

These themes continue at the asset level, with 60% citing asset pricing as one of the biggest obstacles to investment. Competition from other investors (18%) and availability of assets (17%) were also obstacles.

Interestingly, only 1% mentioned taxes as an area of concern. While potential changes to the 1031 exchange regime and estate taxes may affect real estate demand among HNWI, on an overall basis, the expected reduction in income and capital gains tax rates are likely to  benefit this group.

From the perspective of the seller, anecdotal evidence suggests that credit risk of HNWI is an issue to consider while considering this group as a potential purchaser.

 By Revathi Greenwood, Americas Head of Investment Research, CBRE.

[1] Average 2012 – 2016.