Investment Real Estate at Mid-Year: Active, with Substantial Capital But Not Enough of the "Right Product"

Top Quote By Andrew Merin, Vice Chairman Cushman & Wakefield, Inc, Metropolitan Area Capital Markets Group. End Quote
  • Newark, NJ (1888PressRelease) August 04, 2011 - The first half of 2011 has seen significant capital allocated to real estate, but the market remains a "tale of two cities." The absolute right product continues to attract a great deal of interest, but if an asset is "slightly off," there is no action for it. That trend spans all four primary property types - retail, office, industrial, and multi-family.

    Indeed, there continues to be a lack of that "absolute right product" coming to the market in almost every category. In retail, for example, few grocery-anchored shopping centers are coming to the market in our region. Those properties that do are, in some instances, commanding capitalization rates below six. One trend we are seeing are owners cleaning their portfolios of non-grocery anchored secondary product.

    In the office market, class A buildings with long-term credit leases in solid locations are fetching big numbers, with cap rates generally between seven and eight, and in some cases even sub-seven. For value-add opportunities, the lack of activity of a year or two ago has given way to a trend where improving fundamentals are leading some people to look out on the risk curve. We have a major assignment in Stamford for an empty, 560,000-square-foot, class A building, a substantial value-add play that is attracting a lot of interest.

    To date, in New Jersey, our group has done approximately $500 million of office sales so far this year, and the overall marketplace has seen more than $1 billion in total office sales in the state.

    The industrial sector, meanwhile, has been very active. Much of that activity is in anticipation of the expansion of the Panama Canal, the raising of the Bayonne Bridge, and the fact that New Jersey is very much a port-oriented industrial state. On the fundamental side, the market is finally seeing the excess space in the New Jersey Turnpike Exit 7A and 8A submarkets, at heavily discounted rental rates, being absorbed. By the end of the year, the industrial sector is projected to be stabilized to the extent that the market may be seeing new speculative development in the second half of 2012.

    There is a substantial amount of capital chasing industrial in New Jersey. One surprise has been deal execution that is 10-15% higher in value than we anticipated, driven both by the surplus of money and the anticipation of market correction. Our group has done more than $250 million in this product to date this year, with cap rate execution overall in the six- to 7.5-range and one transaction in particular with a sub-six cap rate.

    Another trend for both office and industrial has been obsolete properties trading for their land value. For example, empty office buildings have been trading in the $30-40 per- square-foot range, and industrial buildings in the $10-20 per-square-foot range. Basically, those buildings are tear-downs, typically for an alternative use-office for healthcare, as one example, and industrial for retail re-use because of the typically large fields, or older industrial either for ground-up multi-family or lofts in urban settings.

    And on the multi-family side, there has been a lot of activity, mostly for class B product with a scarcity of class A coming to market. There appears to be a focus by the institutions on joint ventures or forward sales with developers, and there also appears to be activity toward future multi-family development to fill the void. Rents are rising, concessions are basically gone, and overall it is a very healthy sector.

    For our team in general, the first half of 2011 has been very active. We anticipate that our volume will approach $1 billion by the end of the summer, and $1.5 to $1.75 billion for the full year.

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