Private, Foreign Money Flocks to Non-Traded REITs, Tapping into U.S. Market
- Nov 06, 2013
Ella Shaw Neyland, President, Steadfast Income REIT
The real estate investment arena continues to hum fervently as the year comes to a close and investors set their sights on larger 2014 pipelines.
Outpacing previous historic records is the non-traded REIT sector that raised 100 percent more year over year through third quarter of 2013. This trend should continue for the foreseeable future as both private and foreign money flocks to non-traded REITs to tap into U.S. commercial real estate investments.
Despite the rapid-fire fundraising, the non-traded REIT sector has not had trouble investing its capital, with acquisitions maintaining a steady pace in line with the overall commercial real estate sector. While the new capital from investors has pushed the industry to nearly $85 billion in assets, a significant portion of that capital has been on the sidelines as part of closed offerings. However, 2013 has already seen more full-cycle events than in previous years and is providing investors with a timely opportunity to rebalance their real estate allocation and look to sectors positioned for success in the coming years. Retail and office have historically been sound investments and are likely to remain top contenders, however, at 9.3 percent 20-year annualized returns, it would make sense for non-traded REIT investors to take a cue from institutional allocations that typically have apartments between 18 and 20 percent, instead of the current 4 to 5 percent common in the non-traded REIT sector.
Why apartments? Fundamentals are strong, demand continues to be high, and it is the only property type to beat inflation every year since 1987. But as with any real estate, it is all about location, location, location.
In the past, the view has been that interest rates and cap rates in the multi-family sector have a strong correlation. However, in the last few years this has not necessarily been the case as we seem to be operating outside the boundaries of the data. And one of the biggest data discrepancies is expensive coastal properties versus apartments in the central corridor of the United States. The reason: cap rates in the ‘sexy six’-type markets have been in the low 4 percent cap range recently as institutional capital competes for a limited supply of product, thus driving up prices with cap rates reflecting the associated decreased yield. This also explains why new construction is on the rise in those markets as developers build into yields that are 150 basis points higher.
Conversely, in Central U.S. markets, job growth is strong as the majority of those markets have recovered all of the jobs lost during the recession … but the apartment stock is greater and the competition from buyers has not been as frothy. So cap rates versus the 10-Year Treasury have maintained much stronger spreads. This competitive price point advantage results in apartment rents that are affordable for the jobs being created. As the economy slowly recovers, we are seeing an increased opportunity to increase rents creating an inflationary hedge for our investors. We have seen some cap rate compression recently, and strong fundamentals in those markets which have resulted in increased values.
Apartment transaction activity should climb in coming months. Middle America markets where job growth generally exceeds the national average and the cost of living is lower than the coastal markets could see significant activity — even from large institutional investors that have generally overlooked those markets.