Buyers Are Back
Investors step into the light in search of safe bets.
Commercial real estate investors are lumbering out of the woods
and back into the game. The menagerie of buyers shopping for properties in
today’s market runs the gamut from private individuals to billion-dollar
institutions. But one thing they all have in common is that competitive spirit
and a belief that commercial real estate markets have hit bottom.
“The volume in investor interest and activity is way up,” says
Gary Hunter, CCIM, a managing broker and commercial investment specialist at
Colliers International in Seattle. Over the past year, Hunter has closed
several transactions totaling about $3.3 million. “At this point, demand for
all asset classes is beginning to pick up with multifamily, small retail, and
industrial buildings seeing the most activity in our market,” Hunter says.
Clearly, the desire — and the money — to get deals done exist.
Investors who have been sitting on cash waiting for market fundamentals to
stabilize are now getting ready to pull the trigger on acquisitions. Debt
markets also are beginning to loosen with more capital available, especially
for properties in strong locations that are well-leased to credit tenants.
Following a record-low year for sales transactions in 2009,
commercial real estate sales volume rose in 2010 and many industry experts
expect that momentum to continue in 2011. The volume of commercial real estate
sales reached more than $120 billion in 2010. Although that is a marked
improvement over the $54.5 billion in property that changed hands in 2009, it
is still well off the record $514 billion in sales that occurred at the market
peak in 2007, according to data from New York-based Real Capital Analytics. The
research firm tracks office, industrial, retail, apartment, and hotel sales
valued above $5 million.
So what are some of the dynamics driving today’s investors?
Overall, institutional buyers such as real estate investment trusts and life
insurance companies are aggressively shopping major metros such as Washington,
D.C., New York, and San Francisco for core properties in all segments of the
market — apartments, retail, office, industrial, and hotels. Competition and
pent-up demand for quality properties is pushing those buyers further out into
secondary markets such as Minneapolis, Denver, and San Jose, Calif. Smaller
private buyers, especially those with access to capital and local expertise,
are finding solid investment opportunities outside of major metros in secondary
and tertiary markets. Those private entities are pursuing a variety of
strategies ranging from conservative triple net lease properties in Florida to
opportunistic land acquisitions in busted residential subdivisions in Alabama.
Investors today are generally chasing properties in one of two
categories: the relative “safety” of quality — well-leased properties in top
markets — or the higher yields of opportunistic or distressed real estate
assets. Core properties remain the favorite investment type.
“Throughout the entire year of 2010 there has been a tremendous
flight to quality, whether it is retail, office, apartments or what have you,”
says Craig Thomas, CCIM, a senior associate and associate director of the
National Retail Group at Marcus & Millichap in Jacksonville, Fla. That
demand reflects the caution that is still rampant in the marketplace today, and
the recognition that both the economy and commercial real estate markets are
still facing a long, slow recovery.
Top Investment Picks
Multifamily is the property of choice among buyers due to
improving fundamentals and a positive outlook for strong renter demand.
Apartment vacancies dropped from 8.0 percent in 2009 to 6.6 percent in fourth
quarter 2010, while effective rents rose 2.3 percent in 2010, according to New
York-based Reis. “The primary reasons for the strong interest in multifamily
properties are the availability of financing and a growing supply of renters
due to the echo boomers, aged 20 to 34, moving out of their parent’s house and
into apartments,” says Andy Burnett, CCIM, a senior adviser at Sperry Van
Ness/William T. Strange & Associates in Oklahoma City.
Government service entities such as Fannie Mae and Freddie Mac
have continued to finance multifamily
transactions over the past three years, which has helped to fuel sales
transactions within that sector. For example, Sperry Van Ness/William T.
Strange & Associates brokered the two largest multifamily transactions in
the state of Oklahoma during 2010 with the $17.2 million sale of Regency Tower
and the $19.7 million sale of Stoneleigh at May apartments. Both Oklahoma City
transactions were funded through Freddie Mac.
In fact, demand for apartments is so strong that it is spurring
buying activity across the spectrum of class A, B, and C properties in primary,
secondary, and tertiary markets. That competition has put pressure on pricing.
Capitalization rates for top quality mid- and high-rise apartments dropped 75
basis points in 2010 to average 5.5 percent in 3Q10 and remained unchanged in
4Q10, according to Real Capital Analytics.
“Apartments are always on the radar but are overpriced today,”
says Ronald D. Jury, CCIM, president of Jury & Associates in Shawnee
Mission, Kan. As a result, some investors — particularly those with access to
capital and the ability to hold an asset long-term as the market recovers — are
finding good value-added opportunities in other sectors. For example, it is a
buyer’s market as it relates to office buildings that are either in foreclosure
situations or are struggling with high vacancies. “With today’s unemployment,
you have to have a strong investor who is willing to buy those because it is
going to take five to seven years to get any type of occupancy back in those
buildings,” Jury says.
Last fall, Jury assisted an owner-user in acquiring a
225,000-square-foot, class A office building in downtown Kansas City that
included a covered parking garage for 565 cars. The property sold for just
under $12 million, which is less than it cost to build the entire parking
garage. “It is not often that you have an opportunity to buy a parking garage
at cost and get a class A building thrown in for free as a part of the
transaction,” Jury says. “It will be a long time before we see pricing like
Investors and lenders alike also are demonstrating a stronger
appetite for single-tenant net-lease properties. Marcus & Millichap closed 950 retail transactions
nationwide during the first 11 months of 2010. Those transactions were valued
at $2.23 billion, which represents a 10 percent increase compared to 2009. The
majority of those retail sales, about 65 percent, involved single-tenant net-leased properties priced between $1 million and $20 million.
“There is a lot of risk aversion that still exists in the market,”
Thomas notes. Triple-net acquisitions are very attractive for the asset
preservation and steady cash flow of long-term leases with corporate credit
tenants such as Walgreen’s or McDonald’s, he adds. The surge in demand for
net-leased properties is driving prices higher, especially among top credit
tenants. For example, Thomas recently brokered a ground lease on a McDonald’s
in north Florida that went for a 5.5 percent cap rate.
Searching for Bargains
Although there has been an expectation that there will be a
significant number of distressed properties hitting the for-sale market, those
bargains have been slow to materialize. Lenders have been reluctant to
foreclose and instead are willing to do loan workouts and extensions wherever
possible in order to keep the distressed assets off their books. However, some
of those deals will continue to hit the market in 2011.
“Banks are ready to start moving these commercial properties that
they may have taken back in foreclosure almost a year ago in some cases,”
Hunter says. For example, Hunter is listing a vacant restaurant property in
Seattle for Wells Fargo. The property reverted to the bank after the restaurant
operator filed for bankruptcy. Most of the offers on that property have been
well below market. The current offer for the 5,280-sf property is about
two-thirds of the $1.2 million appraised value. The bidder is a religious
organization that would like to convert the restaurant to a church.
Investors also are chasing bargains in discounted land plays.
Spanish Fort, Ala.-based Bellator Real Estate and Development represents
several investment groups that are making discounted purchases of developed
lots, partially developed subdivisions, and raw land. “Once we acquire these
subdivisions, the focus is on facilitating activity within them, whether that
is raising money to loan back to home builders or promoting the subdivision to
generate pre-sale houses,” says Nathan Cox, CCIM, Bellator owner and president.
Bellator currently manages about 20 separate investment groups
that vary in size from several hundred thousand dollars to a few million
dollars. So far, the investment groups have committed about $10 million to land
acquisitions throughout Baldwin County, Ala. “There is a lot of interest from investors
who don’t want to miss the boat,” Cox says. Bellator has been able to acquire
lots at between 20 cents and 40 cents on the dollar compared with what they
sold for at the peak of the market. For example, the firm has bought some lots
at $12,000 that were selling for $130,000 in 2007, while others have been
priced at $20,000 compared to sale prices of $80,000 a few years ago.
“We have seen a big shift in the last few months by banks trying
to get this stuff off their books, so we have been real active trying to
acquire property,” Cox says. Bellator anticipates a very busy year in 2011 with
some of the bulk residential land deals starting to slow down in 2012. The firm
is targeting opportunities within Baldwin County — specifically the eastern
shore in communities such as Spanish Fort, Daphne, and Fairhope — which
experienced a big boom and bust in its housing market.
Although distressed sales are still scarce, many industry
observers are hoping that the resurgence of investor demand and thaw in debt markets
will help to bring more for-sale properties to the market in the coming year.
“As a whole, whether it’s investors, developers, retailers, tenants, or
brokers, folks know they are going to have to work longer and harder on each
individual deal to get them across the goal line,” Thomas says. “But that is
happening, and overall, I think the outlook is very positive for 2011 and
Beth Mattson-Teig is a freelance writer based in Minneapolis.