Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/206598
Commercial Real Estate Capital Sources of capital into the fnancial markets. Te expanded period of monetary easing and the absence of governRegional/Local Bank ment-supported distress sales have 75% National Bank boosted the national mortgage International Bank market. Tis paved the way for cap rates and real estate values to bounce 50% Insurance back far more quickly than in preGovernment Agency vious recessions and well ahead of 25% Financial an actual operating recovery. Te exception to this trend occurred CMBS in multifamily properties, which 0% recovered even faster than the other 08 09 10 11 12 13* sectors. *Through 2Q Whereas tough credit underwritSource: Marcus & Millichap Research Services, Real Capital Analytics ing continues to be an obstacle for potential borrowers, the Federal Reserve's accommodative policies resulted in real estate investment earning its place as a mainstream aimed at reducing near-term interest rate risk have aided in the refasset class. nancing and restructuring of maturing and difcult loans. Tis has For today's real estate investor, advanced facts and fgures, deeper resulted in more capital entering real estate as a comparatively sound liquidity, and a range of broad investment opportunities that reach alternative to reduced yield bonds and volatile equity markets. beyond merely primary metros have all allowed the further mitigation of risk. As supply cycles continue their two-decade trend of A Hybrid Investment stabilization, the sector remains less volatile as a whole. Convergence Since the market bottomed in 2009-10, commercial real estate of these infuences has refned the foundation for attractive real estate investors have favored the greater certainty of top-tier markets cost positioning, resulting generally in falling capitalization rates and properties with proven cash fows, despite their generally over the last 20 years. lower yields; this focus on prime markets limited meaningful price recovery to coastal and urban core markets, until investor Cap Rate Movement interest began to spread a year-and-a-half ago. With most gateway Typically, cap rates are inclined to stay range-bound during eco- primary markets having substantially recovered, occupancy and nomic infection points, with a usual variance of between 100 and rent growth momentum has expanded to late-recovery secondary 130 basis points. Whereas the length and severity of the the 2009 and tertiary metros. Tese areas may garner higher yields and ofer Great Recession and the 2001 Recession were markedly diferent, room for net operating income gains, but they also carry higher the recovery trends of cap rate performance proved surprisingly risk. Many of these areas face relatively higher overdevelopment threats, less consistent demand, and more shallow liquidity, all of similar. During the peak of the fnancial crisis, cap rates expanded from which could afect investor exit strategies. Refecting these trends, 6.9 percent to 8.1 percent between 2007 and 2009 before making a the maturing primary markets have faced slowing cap rate comremarkably accelerated recovery, especially given the depth of the pression and even rate upticks. Conversely, cap rates in secondrecession, according to fgures from Real Capital Analytics, CoStar, ary markets have tightened, supported by stronger operational and Marcus & Millichap Research Services. While the annualized momentum and sales volume. Naturally, investor risk will depend yield on the 10-year Treasury declined 280 basis points to 1.8 per- in part upon a market's position along the arc of the real estate cent between 2002 and 2012, the mean annualized cap rate for all cycle and the investment time horizon. Te hybrid nature of commercial real estate makes it a compelproperty types dropped 150 basis points. Since the end of 2012, the 10-year yield has abruptly expanded 100 basis points to 2.9 percent ling investment option, with a bond-like cash fow component even as of September 2013. In evaluation, the mean cap rate proved more during economic downturns, as well as an appreciation component steady, edging down only about 10 basis points to 7.2 percent. While a that ofen acts as a hedge against infation, considering that propdelayed efect is still a possibility, forecasting the potential magnitude erty owners beneft from increasing rents and property values when requires deeper analysis. infation rises. In addition, many long-term leases contain consumer Troughout the Great Recession, the Federal Reserve has held price index rent increases, while shorter-term leases allow investors the federal funds rate to nearly zero while infusing huge volumes to quickly adjust to market rates. 32 November | December | 2013 Private/Other Percent of Total 100% Commercial Investment Real Estate