Analysts say commercial real estate (CRE) investors continue to diversify their holdings as the real estate recovery makes a wider variety of properties more enticing. Prime property investment is giving way to more interest in secondary property types in secondary markets and new developments as more options become available. That means more investors are willing to take on more risk, particularly in the apartment sector. Experts say booms in secondary markets are common in recoveries, however, as are resurgences in development. For more on this continue reading the following article from National Real Estate Investor.
Investors continue to broaden their scope beyond stabilized apartment properties in core markets to increase the yield on their commercial real estate investments. As the recovery continues investment activity on other property types, secondary markets and new development continues to pick up.
“They are starting to broaden their search,” says David Cardwell, vice president of capital markets for the National Multi-Housing Council.
Secondary property types
Investors are so eager to find higher yielding investments in commercial real estate that a growing number are willing to choose riskier property types like industrial, strip retail centers and suburban office properties over the stability of apartment properties.
Investors continue to buy apartment properties at a greater volume—but those other property types are catching up. For example, investors bought $19 billion in hotel properties in the first three quarters of 2013—a 49 percent increase over last year, according to numbers from Real Capital Analytics. Volume rose by more than a 25 percent for office, retail and industrial properties. The volume of apartment properties rose as well, but by 21 percent—the slowest pace of all the major property classes.
Recent transactions also illustrate that cap rates on other property types is beginning to catch up to the multifamily sector. Average cap rates for apartments continue to sit around 5.5 percent in the top markets. “We’re seeing a plateauing in pricing for multifamily,” says Dan Fasulo, managing director for RCA. Meanwhile, cap rates for other property types are inching downwards.
Investors including Blackstone are making significant purchases of suburban office properties, a property type that fell out of favor after the crash. The rental income produced by these properties suffered and occupancy rates rose in the wake of the recession. “The smart money is not necessarily betting tenants are going to flock to suburbia,” says Fasulo. Instead, prices are likely to appreciate on these properties simply because demand has risen from investors seeking higher yields than apartments have to offer.
Secondary markets also continue to catch up to primary markets as economic recovery deepens. “Almost all the markets moved in a positive direction, but the biggest gains are in secondary markets,” says Fasulo.
The volume of apartment properties bought and sold in New York City actually dropped by about a third in the first half of this year compared to last year, according to RCA, though cap rates and pricing remain strong. The volume of multifamily sales also sagged in a number of other core markets like Los Angeles and San Francisco and even strong secondary markets like Raleigh Durham, N.C., and Austin, Texas. Meanwhile, investors bought more than twice as many apartment properties in markets like Orlando, Fla.; Las Vegas, Nev.; and California’s Inland Empire than they did a year ago.
The boom in secondary markets is a normal step in the process of a real estate recovery. “We saw the same thing in 2005 and 2006,” says Fasulo. Major gateway markets recover first, and draw most of the attention from investors until they become too expensive—particularly for institutional investors such as pension funds that need to certain a certain return each year.
Investors are also beginning to build new properties. “We are in the early innings the development recovery,” says Fasulo. Buyers have bought $11 billion in developable land so far in 2013. That’s up almost a third from a year ago at this time, according to RCA. The majority of this planned development is multifamily construction in a range of locations, from urban development to garden apartments.
This article was republished with permission from National Real Estate Investor.