Commercial Investment Real Estate

JAN-FEB 2015

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.

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29 January | February | 2015 CCIM.com according to Reis. Some metros are expected to outpace expectations, such as Portland, Ore., with stagnant cap rates in the of ce market, and Minneapolis, which is expected to see slightly higher rental growth than the national average over the next couple years. Industrial. Vacancy in the industrial sector decreased to 9.0 per- cent in 3Q14, according to Reis, and was accompanied by ef ective rental growth of 2.5 percent YOY to $4.45 psf. Transaction volume increased by 6.0 per- cent, with prices increasing 17.3 percent to $77 psf over the past year, per RCA. RERC's required pre-tax yield rate for the industrial sector declined to 7.7 percent, while the required going-in cap rate decreased to 6.0 percent in 3Q14. Reis forecasts the industrial vacancy rate to decline to 8.0 percent by 2016, and for ef ective rent to grow by 3.3 percent. Industrial vacancy is expected to decline even more in some markets, such as Sacra- mento, Calif., and Orlando, Fla. Multifamily. The vacancy rate for the apartment sector increased slightly in 3Q14 to 4.3 percent, while the ef ective rent rose 3.91 percent during the past year to $1,117 per unit, according to Reis. As reported by RCA, 12-month trailing transaction attractive. Investors will continue to purchase real estate, prices will continue to increase, and values will continue to chase prices, as capi- talization rates on a broad market perspective will further compress. As shown in Table 1, RERC's value vs. price rating for commercial real estate overall dipped slightly to 5.3 on a scale of 1 to 10, with 10 being high, during 3Q14. However, with the midpoint of the rating scale at 5.0, a rating of 5.3 indicates that value vs. price can still be found in commercial real estate overall, despite the slight decline in this rating during the past few quarters. On a property sector basis, the value vs. price rating increased for each of the sectors (except for the hotel sector) during 3Q14. As shown, the industrial sector retained the highest value vs. price rating among the property types. However, all sector ratings were higher than the midpoint of 5.0, which means that prices still have room to climb before properties become overpriced (compared to their value) — at least as long as interest rates remain low and cap rates have room to further compress. A Closer Look at the Property Types Of ce. T e of ce market continues to struggle. T e vacancy rate was 16.8 percent in 3Q14, which was only 10 basis points lower than a year ago, according to Reis. Despite that, ef ective rents increased 2.7 percent to $23.94 per square foot year over year. In addition, according to Real Capital Analytics, 12-month trailing transaction volume increased more than 27 percent to $121 billion in 3Q14 compared to the previous year, and prices psf increased by 6 percent to $245. RERC's required pre-tax yield rate (internal rate of return) dipped to 7.9 percent, and the required going-in cap rate decreased to 6.1 percent in 3Q14. Figure 5 illustrates the spreads between RERC's required pre-tax yield rates and going-in cap rates and 10-year Treasurys. Vacancy is expected to drop to 16.3 percent and rents to increase 3.7 percent by the end of 2015, Figure 3. Global Risk-Free Rates in World's Major Developed Economies Source: Real Capital Analytics, 2Q 2014, CNN Money October 2014 RERC'S TOP 10 PERFORMANCE MARKET PICKS FOR 2015 Although total returns are expected to remain strong for many markets in 2015, some of the secondary and even tertiary markets are likely to be the top performers, per RERC's analysis: 1. Houston 2. San Francisco 3. San Jose, Calif. 4. San Diego 5. Miami 6. Orlando, Fla. 7. Salt Lake City 8. Denver 9. Washington, D.C. 10. New York City

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