(Be sure to check out our Podcast with Jack Kern, research editor/chief investment research officer of Continental Realty Advisors, and Mike Ratliff, senior associate editor, examining how 2013’s commercial investment activity will stand up to 2012.)
Apartments had an impressive year when it came to transaction activity in 2012. The major investor groups seemingly had a change of heart and began to more strongly acquire properties in secondary investment markets—something not seen at this volume of activity for many years. While the more notably popular markets comprising major East Coast, West Coast and Sun Belt cities continued to populate the leaderboard with large volumes of activity, more secondary investment grade markets became better known to investors. Is Boise the new Baltimore? Probably not, but then again, markets like Cincinnati, Louisville and Kansas City started to see more acquisition activity. Between garden, mid- and high-rise properties, levels of activity continue to demonstrate strong investor preference for the continued dominance of multifamily as the investment preference of major funds.
For all of the sectors we’ve surveyed (see an expanded list in Commercial Property Executive), some factors have become more meaningful for all of the firms in the space. The first point is that as we’ve come out of the 2007-2010 economic slowdown, investment in all areas has increased at a very rapid pace. This not only suggests that the triple benefit of lower interest rates, more available equity capital and a positive ownership position with pricing power exists, but that it is expected to continue for quite some time to come.
We believe that the economy had a major impact during this fast-moving cycle, but with what are mixed and somewhat puzzling results. Normally, investors place capital during slower periods in the cycle when there is a belief that improving market conditions will provide for pricing power, earnings growth and increased yields. Apartments are a favored category because of their long-term stability and the ease with which pricing is adjusted to match market conditions. The number of units helps to manage market volatility as well. Office, retail and industrial have more sensitivity to the general economy, but all have seen large transaction volumes. We believe the trend in all sectors underlies a strong belief on the part of investment professionals that there is growth in the economy in the near term. With the economy moving so slowly and the real estate investment cycle moving so rapidly, the real question our survey brought out is this: Will this cycle end abruptly, with subsequent investor cycles getting shorter, or do we return to more traditional longer-term hold periods after all? With the volume of transactions coming from the most influential investors expected to increase, we’re looking forward to following the trends for the rest of this year.