Bifurcated Investment: A Case of the Haves and Have-Nots
- Aug 01, 2012
The commercial real estate investment markets can be characterized today as very bifurcated, almost directly reflecting the “haves” and “have-nots” in terms of national and regional economic recovery. As a result, the premier assets and the premier locations with better growth prospects are receiving the most attention and the best pricing, while most other assets—lacking those characteristics—are experiencing less liquidity and a fall-off in pricing. In part, this has reflected the dominance of core investment mandates over core-plus or value-add strategies.
Even so, the institutional transaction market saw historically low cap rates through the first half of 2012, due to dropping Treasury rates and uncertainty about other investment alternatives. Given the widening yield spread that has emerged between Class A and B assets that have been offered to the market, both sellers and buyers are left with a tactical puzzle as to which asset type to target first.
As 2012 began, expectations for a “normal” national recovery became suspect as the housing markets stalled, the Euro zone and developing countries’ economies stumbled, and deleveraging and policy issues stole headlines. Institutional investors and lenders re-emphasized their 2010/2011 attention to the best-performing urban centers – Washington, D.C.; New York City; Seattle; San Francisco; and West L.A. – for the best in office, multi-family and retail product, and to the large infill or corporate distribution-center markets – Los Angeles, Seattle, Miami and New Jersey – for core industrial. Newly built, stabilized multi-family and retail product garnered cap rates as low as 4 percent, and spec industrial “forwards” were priced at a 6 percent yield, with stabilized industrial in the low 5 percent range. As the 10-year Treasury hits 1.5 percent, these yields are attractive, and rent rolls with fixed increases offer an inflation hedge.
Meanwhile, suburban office product, small-bay industrial, strip centers and Class B multi-family product offerings are experiencing limited interest, tougher loan terms and higher cap rates than in “normalized” periods. “Old Economy” markets in the Midwest continue to see cap rates in the high single digits. Large, multi-asset portfolio offerings are trading in the lower cap-rate ranges only if the offerings are homogeneous; “portfolio premium” pricing does not exist today for those that include lesser-quality assets or economically challenged locations.
As cap rates compress, investors have begun to reach into the stronger secondary markets in search of yield, and some will eventually bet on a recovery in the B assets, believing that the prices for the best assets are too rich. If that is the case, we will see greater volume into 2013, as the uncertainty created by an election year passes and sellers come off the sidelines.