The darling of the commercial real estate investment world continued to be multi-family. With long-term debt at sub-4% interest rates provided by Fannie Mae and Freddie Mac, buyer activity remained “white \ hot.” Multi-family investment sales activity in 2011 outpaced the number and quality of transactions completed in 2010. The 340-unit Barrewoods Apartments sold at a 5.72% cap rate for $100,735 per unit ($34.25 million). The 324-unit Cordillera Ranch was sold by Sentinel Real Estate Corporation to A.G. Spanos Companies for nearly $32.6 million and at a 6.34% cap rate. Sentinel Real Estate Corporation also purchased the Fairways at Corbin Park, a 276-unit complex in Overland Park, Kansas, for $30.5 million at a 6.0% cap rate.
|The Fairways At Corbin Park|
Investment Summary & Outlook
Commercial real estate fundamentals are improving across all sectors, albeit at varied paces. This recovery has been more muted than many expected as a result of continued softness in the general economy. Yet, commercial real estate has been an unintended beneficiary of the soft economy. The dearth of new construction and resultant delivery of new properties has aided in the slow improvement of underlying fundamentals, especially in the multi-family sector, as demand continues to outweigh supply. The lag in the improvement of market fundamentals within the office, industrial and retail sectors, as compared to multi-family, is an indicator of adjusted expectations and of course, slow job growth. While the drastic drop in development activity and contracted demand levels may have reduced overall real estate activity in the short term, activity is expected to grow quickly if and when new job growth is evident.
Expect 2012 to again see an increase in investment transaction volume. There is definitely sufficient capital for investment transactions, but the limiting factor will continue to be the “supply of marketable properties” to fuel transaction growth. The deleveraging process will continue and take time to sort through as properties get right sized, as it relates to debt levels. Moving forward into 2012, debt availability should grow further than 2011. Lenders will continue to hold on to strict underwriting standards, and in most cases, will be more concerned about the sponsorship of a particular deal first and the underling real estate second. Low interest rates will continue to be attractive to borrowers, and with historically low treasury rates, institutions will look to place money in core real estate deals to achieve 4 to 5% versus sitting in treasuries at 2%.
Best Bets 2012
With the exception of multi-family, none of the property sectors offer sure-fire opportunities for big gains in 2012. As addressed in this report, owners can feel secure in Gateway cities and buyers will continue to focus on the few markets generating jobs. Look for commercial developers and construction lenders to remain on the sidelines unless a single tenant credit build-to-suit becomes available, which will ensure a feeding frenzy by developers chasing the deal. The sectors that will garner the most attention from equity investors in 2012 will be Class A multi-family, Class A enclosed malls, infill neighborhood centers, gateway industrial and on-campus medical office buildings. Look for investors to continue to capitalize on low interest rates by refinancing properties through 2012. Lenders will not be likely to allow owners to pull cash out unless a deal is underwritten to strict standards, but good properties with high occupancy should find plenty of options for replacement debt, albeit at lower LTVs (loan-to-value). However, don’t be surprised to see some investors still sitting on the sidelines in cash until the economy shows some real signs of significant recovery.
Block Real Estate Services
Block Real Estate Services, LLC