New CBRE survey sees debt as 2023’s most attractive alternative investment 

US investors will adopt more debt and opportunistic strategies this year, says the firm’s January Investor Intentions Survey.

More commercial real estate investors will implement debt strategies in 2023 as they hunt for attractive returns amid tighter financial market conditions, according to CBRE’s latest US Investor Intentions Survey.

Chris Ludeman, CBRE’s global president of capital markets, believes that while weakening macroeconomic conditions and rising interest rates will weigh on commercial real estate investment volumes in 2023, the amount of capital targeting the sector remains abundant.

“Investors are willing to accept more risk to achieve higher returns and other metrics such as lower leverage, increased debt service coverage ratio, and once again, a focus on acquiring assets at a discount to replacement cost have all been pushed to the forefront,” Ludeman said.

But despite continued conservative underwriting, most lenders are currently quoting loans and winning new business, Rachel Vinson, CBRE’s US president of debt and structured finance pointed out. However, some expect new originations to decline 10 percent versus the prior year.

“Concerns around maturity risk and more conservative underwriting criteria from traditional lending sources – focused on wider going-in and exit cap rates, and higher debt yields – will contribute to the further rise of opportunistic investors,” said Vinson. “While uncertainty continues, the need for capital, whether for tenant build-outs, basic improvement or ESG upgrades, is certain. The question remains: how long can both lenders and borrowers wait?”

The report also shows investors are showing a preference for opportunistic strategies and high-performing secondary markets, with Sun Belt cities seen as most appealing. Dallas is the top target market, followed by Austin, Miami, Los Angeles and Nashville. Investment activity will pick up in the second half of the year as market conditions stabilize, added Ludeman.