As noted in the first quarter 2014 PricewaterhouseCoopers Real Estate Survey, investors in the commercial real estate (CRE) industry are optimistic, eager and well- capitalized, but the missing piece of most acquisition strategies is quality offerings. Exacerbating this situation is that access to both debt and equity capital continues to improve with very attractive interest rates and loan terms for top-notch deals.
The report indicated that in the office sector, top-performing office markets continue to be where many investors prefer to invest, which is resulting in too much capital chasing ad too few deals. This has created situations where the desire to maintain underwriting discipline and the need to address investor demands to deploy or return capital may be in conflict. The search for “value-added” opportunities that provide greater returns is challenging in an environment where buyers are using aggressive lease-up and rent growth assumptions to support pricing.
For the apartment sector, there appears to be more of a focus on development opportunities and watching this sector’s expanding supply pipeline. Avoiding oversupply in the long- term is a challenge. There are many new apartment developments underway or in the planning stages and combining this with an expected slowdown in rental demand could signal a surge in offerings, as the number of apartment markets in the contraction phase of the real estate cycle grows.
In particular, as investors look to capitalize on the ongoing recovery in the U.S. warehouse sector, an imbalance is developing as the number of eager buyers, which now includes family offices, sovereign wealth funds and other international investors, are competing for a limited amount of quality offerings. Still sales of significant industrial properties totaled $4.2 billion in January 2014, up 47.0 percent on a year-over-year basis, but down from the prior month, according to Real Capital Analytics (RCA).
The conundrum for buyers is that although some investors expect the number of quality assets to grow throughout 2014, due to upcoming debt maturities and stronger CRE fundamentals that prompt owners to sell, there is speculation in the market that owners will opt to hold stabilized assets, especially in the office sector, in order to capitalize on the expectation of growing rents and to avoid the task of determining where to redeploy capital.
Article written by Robert Klein, a tax partner in the BDO Real Estate Industry practice. It was originally published in the BDO Real Estate Monitor Spring 2014.