CHICAGO — Rising interest rates and the potential tapering of quantitative easing may have given investors momentary pause about committing to commercial real estate, but those two factors ultimately don’t appear to be dampening the enthusiasm that investors of all stripes have for the sector.
According to Jones Lang LaSalle (JLL), investment sales in the first half of 2013 increased 18 percent compared to the same period last year. Transactions may slow in the early part of the second half of 2013 given the timing of interest rate increases and quantitative easing discussions, but activity is expected to bounce back strongly later in the third and fourth quarters.
In the end, full-year sales volume should increase between 10 to 15 percent when compared to 2012, say the experts at JLL Capital Markets.
“With institutions, private equity, high-net-worth individuals and foreign investors all in aggressive pursuit of commercial real estate, transaction activity in the United States should remain brisk and continue to grow,” says Jay Koster, Americas president for JLL Capital Markets. “In particular, we expect office sales transactions to significantly boost volume in the second half of the year, with activity propelled by improving employment growth within the technology, healthcare and energy sectors.”
JLL expects to see a continued increase in activity for top-quality assets in secondary markets as investors, discouraged by the currently low yields on prime assets, begin to set their sights higher up the risk curve. Buyers in the United States also will continue to benefit from an array of financing options.
While CMBS volumes were very strong throughout the first part of the year, the CMBS world seems to have absorbed the impact of rising rates and volatility, and thus strong competition remains across the CMBS lender universe. Capital remains widely available from the balance sheet lenders as well, and so our overall debt outlook remains favorable, and capital availability should continue to support the expected level of overall market transaction volume.
As for transaction trends in the individual U.S. property sectors:
• Investors’ fondness for suburban and secondary office markets continues. In the first half of 2013, most primary markets continued to set a solid pace in office transaction volumes. Overall activity was bolstered by large sales in the CBDs of Chicago, New York and Washington, D.C., and primary market share of office sales was 53 percent in the first six months. Capital from Germany, the Middle East and South Korea has been particularly evident in primary markets.
At the same time, with pricing rising in primary markets, investors also continue to search for yield in secondary and suburban markets. As a result, secondary market share of office sales in the first half was 43 percent.
“Activity in Atlanta, Dallas, Houston and Minneapolis is keeping that share strong, and based on the heated investment competition in primary markets, there are very solid prospects for additional sales growth in these areas,” says Marisha Clinton, director of capital markets research for JLL.
• Investors in hot pursuit of industrial. Investors continue to covet quality industrial properties in primary markets such as the Northern New Jersey, Central Pennsylvania, Chicago, Texas and the Inland Empire. Fundamentals continue to improve, with the big box logistics and bulk distribution sector leading the way.
Major demand drivers are e-commerce, food & beverage distribution, 3PLs, consumer goods and manufacturing.
“Class A cap rates have compressed by 50 to 75 basis points since the start of the year,” says John Huguenard, international director and leader of industrial capital markets for JLL. “The large portfolios continue to be highly desirable and price aggressively. The limited Class A offerings and ability to put out a large amount of capital in a single transaction result in a portfolio premium.”
The combination of limited quality product, a continued decline in vacancy for bulk product (13 consecutive quarters) and increasing rents has resulted in both build-to-suit and speculative development in virtually all primary and top-tier secondary markets.
• Multifamily still appealing. The multifamily sector remains a prized possession among investors, continuing to garner strong interest across the board. Nearly 250,000 multifamily units are currently under construction in the United States, but there is little fear that the new supply will temper rent and occupancy growth in the year ahead, as the sector’s underlying fundamentals are so strong that investor interest won’t abate.
“Because of the favorable demographics and socioeconomic trends facing the apartment industry, the number of markets that core-focused investors will consider for multifamily properties is much higher than for other property types,” says Jubeen Vaghefi, international director and leader of multifamily capital markets for JLL.
• Retail pricing poised to rise. Although occupancy rates and rents for retail properties continue to rise ever so slightly, there are important signs that the sector could be on the verge of significant improvement, and the market already is seeing higher sales values and decreased cap rates for core assets.
“With the Conference Board’s Consumer Confidence Index spiking in the second quarter and the home market gathering strength, the U.S. retail market has become the object of much more intense investor interest,” says Kris Cooper, managing director of retail capital markets for JLL.
JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers.