A PwC survey reports that real estate investors are optimistic that the recovery is underway in commercial real estate, albeit in fits and starts. As investors strive to deploy capital in anticipation of rising interest rates, core assets are primary targets, although the report says that less attractive properties are beginning to appear on the radar screen. The effect of this interest has been to push cap rates down. The survey reports that cap rates decreased in 27 of the 31 markets surveyed. The expectation is that cap rates will either decline further or hold steady.
Cap rates remember are integral to the pricing of a commercial real estate property. They represent the expected rate of return on capital invested based on the net operating income generated at rent stabilization. As rates decrease and NOI remains consistent, the price rises. IRRs also are lower. Best in class in some markets are showing IRRs in the 8% range.
The CEO of Allianz Real Estate America, the U.S. real estate arm of German insurer Allianz, announced that the company expects to invest between $1 billion and $3 billion in United States real estate over the next few years.
Both PwC and Allianz identified the multifamily sector as currently the most attractive for near-term prospects.
The news on the residential front was not good. The Department of Commerce reported that single-family home sales fell 16.9% from January to February. The seasonally adjusted annualized rate of 250,000 is the lowest on record. Sales fell by 28% year-over-year. Blame was liberally spread around to continuing high unemployment, the seemingly endless supply of foreclosed homes hitting the market, and the Federal Reserve’s stimulus efforts bottoming out.
Real Estate Development Oddity of the Week: Apparently there has been a significant increase in the purchase of survival bunkers. The earthquakes, tsunamis, volcanic action, violent storms, spreading unrest and violence in the Middle East, and various predictions (not the least of which being the Mayan target in December, 2012) are pushing some people into a survival mode.
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