2020 LightBox Investor Sentiment Report Delivers Actionable Data for Real Estate DevelopersFebruary 27, 2020Real Estate DevelopmentBy: LightBox TeamShare: TwitterFacebookLinkedInEmailThe 2020 RCM/LightBox Investor Sentiment Report is packed with information every real estate developer will want to have in their pocket while setting this year’s business objectives. We surveyed leaders in the industry, including real estate developers, investors and lenders, asking them to share how pricing trends, the state of the economy, seasonal factors, and national and world events will impact their decisions in the coming year.Digging through the data of this year’s Investor Sentiment Report, we discovered several key insights all real estate developers can leverage to optimize business dealings throughout 2020. Investor attitudes are generally optimistic, even as they carefully watch how economic and political signals are affecting the market. Additionally, investors are shifting strategies to minimize risk, and are being creative and strategic in their investment decisions. This article reveals exactly how these leaders are thinking in 2020 and in years to come. Lender Confidence Shows Business as UsualMost lenders surveyed for the report are heading into 2020 with continued optimism regarding deal velocity, with most agreeing velocity will remain stable to strong this year. According to investment activity tracked by Real Capital Analytics, overall 2019 sales volume totaled $572.3 billion, a level that is 1.2% lower than in 2018. Activity in 2019 is 16.6% higher than 2017 when total volume was $491.1 billion. Year over year investment activity for industrial, multifamily and office assets increased by 14.4%, 4.6% and 2.3% respectively. Lenders surveyed in the report remain confident in multifamily and industrial properties, and even office (but to a lesser degree). This indicates that developers in these spaces should be bullish about continuing to pursue projects into the next few years, as finances are unlikely to be disrupted.Developers should note that lenders do plan to be more rigorous about their underwriting process, but plan to provide capital for well-researched projects in areas that show potential for stability and growth. Lenders are being more strategic, taking a conservative look at property values, loan-to-value-ratio (LTV), and tenant credit. Real estate developers armed with location data that supports project objectives can expect their lending needs to be met, as they will be able to deliver data-driven projections for areas of opportunity. Lenders have generally been more stable following the lending requirements put into place in the post-Great Recession era. This means they are better prepared to handle any potential market adjustments, and are therefore more reliable for real estate investors. “The difference in this cycle versus similar points of other cycles is that we all have a lot more equity in the deals than what was done historically,” says Tracy Ayers, CCIM, Senior Managing Director of Renasant Bank’s Nashville office. When asked how investment sales activity and pricing in 2020 compares to 2019, 45.2% said investment sales activity will remain about the same, and 48.6% said investment sales pricing will remain about the same. These numbers reflect the majority opinion. Additionally, lenders are not expecting the Fed to increase interest rates, and today’s historically low interest rates are a key factor in lender confidence. Of course, the 2020 U.S. election is coming up, and most lenders expect economic activity to slow down closer to the election. As a result, there’s likely to be a surge of investment in the first half of the year, before the election, but most do not expect this to impact business dealings in a major way. Weighing the Benefits of Opportunity ZonesThe Tax Cuts and Jobs Act (TCJA) is known for creating Opportunity Zones (OZ), and is widely viewed as having potential to move billions of dollars into low-income communities. Investors have been eying Opportunity Zones for the past 18 months, and are particularly interested in the prospects for driving substantial deal flow, as well as the additional tax benefits generated at the end of the investment cycle. As a result, investors raised approximately $4.5 billion and are actively pursuing closing OZ transactions. Most transactions are occurring in New York City, Washington D.C., and Los Angeles, and the bulk of OZ investment is in multifamily.Preferred tax treatment is very appealing to investors and developers, and many are exploring ways to leverage OZ. However, OZ deals are falling somewhat short of the initial projections of $50 billion or more being raised. Deal velocity did not reach that level by late 2019, even with a tremendous capital raise environment. Most investors and developers claim that the program has not yet met these expectations because of uncertainties surrounding the program and the need for clarification from the IRS and the Department of Treasury. The government recently released the final OZ guidelines, and this clarity is expected to increase the flow of investment for 2020. In 2019, OZ weren’t a boom for a few different reasons:Complex deal structure: OZ investments must meet specific and complex criteria. One investment out of compliance could impact the standing of an entire fund.Investment/development risk: Investors and developers will not take risks that are not viable, and not all OZ prospects prove to be promising.Intense government scrutiny: Government incentives for OZ mean that the government is closely reviewing investments to ensure full compliance. Delays in delivering full investment guidelines: The government took several months between the time TCJA was announced to the time guidelines were finalized, leaving investors and developers unsure about the program.The LightBox Sentiment Report showed mixed feelings about development in opportunity zones. OZs promise tax relief on capital gains generated through those investments, and those gains can be deferred for years and therefore leveraged for new projects. When asked whether OZs will extend the development and investment cycle, 42.3% agreed, while 45.1% disagreed (with 6.94% strongly agreeing and 4.86% strongly disagreeing). Similarly, investors surveyed for the report are nearly evenly split on whether OZs will help generate additional activity, with 42.7% saying the program can propel activity, while 44.8% say it will not. Ultimately, the success of Opportunity Zone investment remains to be seen, but the program appears to be promising for those able to leverage the program’s huge tax benefits.Overall Message for Real Estate DevelopersThe key findings in the RCM/LightBox National Investor Sentiment Report for 2020 show that there is significant optimism in commercial real estate. Real estate developers can use these key findings to develop strategies that will be a boon to investment in 2020 and in years to come. Location intelligence clearly plays an important role in identifying and leveraging development opportunities, as the economic climate will require agility and strategic decision making.To learn how our map-based real estate application, LandVision™, helps investors and developers alike identify profitable opportunities, request a free demo today!