Commercial Investment

Developers are reporting strong interest in commercial properties from investors in England, Ireland and Scotland.

Despite a growing focus on Asia, U.S. real estate has climbed to the top of the global property market among foreign investors – and by a wide margin.

New York City and Washington are the top two global cities for foreign investors’ real estate dollars, according to the results of the 16th annual survey by the Association of Foreign Investors in Real Estate (AFIRE), but experts say Florida is also seeing its fair share of European investment.

“The ascension of New York and Washington, D.C., as the two top global cities – with London tied for second place – represents a very strong showing for U.S. real estate,” said AFIRE Chairman Karin Shewer, who is also principal at Real Estate Capital Partners, a U.S. real estate investment advisor headquartered in New York City. “It is the only time since the global city category was added to our survey that U.S. cities have taken first and second spots.”

The foreign investment interest in commercial real estate – and residential real estate as well – started rising last year. Now, some are pointing to an all-out European spending frenzy that is expected to continue in 2008 thanks, in part, to a stable long-term U.S. market, declining property prices and a strong pound and euro.

Adrian Pennie, associate director of the Lloyd’s TSB Offshore Banking Miami office, credits both the strengthened pound and the crunch of the subprime mortgage market in the U.S. for the so-called European spending frenzy trend.

“In the UK, we hear quite emotional phrases about the U.S. market, like ‘property crisis’ and ‘credit crunch,’” Pennie said. “We have seen a great many U.S. banks and other lenders close their doors to foreign nationals. That has created another economy for people who have the finances and are able to invest with British pounds.”

Though China is gaining momentum, the U.S. is undeniably a European investment hotspot. On average, AFIRE survey respondents report that slightly more than 50% of their real estate planned acquisitions in 2008 will be allocated to the U.S. While that percentage remains roughly the same as 2007, the actual dollar amount is expected to increase by 16%. In all, global spending on real estate is expected to total $1.692 billion this year.

Garrett Kenny, president of Feltrim Developments in Davenport, Fla., won’t go so far as to say Europeans are stampeding through his doors, but he does see more Irish investors interested in Florida commercial real estate.

In fact, Kenny just closed on a 1.5-acre parcel of land on US 27, the future site of a 48,000sf office building. Feltrim received a $200,000 investment from an Irish investor on the deal. Kenny also cited another Irish investor who offered $500,000 to purchase a hotel site on US 27. Of course, Kenny admitted, he has affinity with Irish investors since he is an Irish developer.

“The weak dollar is attractive, however the Irish invest in euros and want to be repaid in euros, so we have to take a read on the currency situation,” Kenny explained. “The good aspect of using European investors is they appear to be more patient than their American counterparts. My Irish investors are in deals for four and five years.”

Josh Regan, co-founder and the managing partner at New Your City-based Madison Realty Capital, a private commercial lender providing senior-secured bridge loans, has seen increased interest from European institutional investors. MRC has $600 million in capital under management, and a large part of its investor base is in Europe.

“While Europeans were a little more cautious for a period, they are starting to dip into the New York and Florida markets more aggressively,” Regan said. “There is continued interest in distressed properties in particular. Europeans are basically paying half price compared to U.S. investors.”

While the common sense answer to what’s driving European investments in U.S. commercial real estate is “a weak U.S. dollar,” 85% of survey AFIRE respondents said recent fluctuations in the dollar have not prompted them to increase their U.S. allocation. The interest, rather, is driven by U.S. property’s strong stability and appreciation characteristics, survey respondents insist.

The percentage of AFIRE respondents saying it was “very difficult” to find attractive U.S. real estate fell to 22.8% from 37.5% in 2006. This represents the smallest percentage expressing this sentiment since 2003. In fact, for the first time since 2004, a measurable number of investors declared investing in the U.S. to be “somewhat easy.” And for the first time in years “distressed assets” are mentioned in the survey as a new strategic focus, as Regan mentioned.

The question is, how long will it last? Regan said it does depend, in part, on the strength of the dollar. But it also depends on the lack of liquidity in the U.S. market, of which European investors are taking full advantage.

“It could be a year. It could be two years. European investors are serving as a form of liquidity where liquidity is absent,” Regan said. “Some perceive, for example, that the Florida market had much more room to go in terms of decreased values. Others believe now is the turning point and some are willing to enter the market.”

WASHINGTON – March 13, 2008 – Commercial real estate market fundamentals are fairly stable, although investment is waning following a record year in 2007, according to the latest Commercial Real Estate Outlook of the National Association of Realtors® (NAR).

NAR Chief Economist Lawrence Yun says the commercial real estate market is holding essentially even. “We’re seeing no significant changes in vacancy rates or rent growth, so the fundamentals in commercial real estate still seem to be respectable,” he says. “Under normal circumstances, near-full occupancy coupled with positive rent growth would be of strong interest to investors, but we’re not seeing that. The credit crunch has filtered into the commercial real estate market.”

Patricia Nooney of St. Louis, chair of the Realtors® Commercial Alliance Committee, said the investment cycle appears to be turning. “It looks like investors are taking a wait-and-see attitude,” she says. “Even with fairly stable fundamentals and capital available from institutional investors, it appears investor confidence has declined, and some private investors have had problems obtaining financing. Commercial real estate investment set a new record in 2007, but now that we’re in a period of economic uncertainty, transaction volume is likely to decline.”

Investment in commercial real estate in 2007 was $427.2 billion, up 39.2 percent from the previous record of $306.8 billion in 2006; that total does not include transactions valued at less than $5 million or investments in the hospitality sector, based on analysis of data from Real Capital Analytics. NAR projects the investment dollar volume this year could drop by 30 to 40 percent, comparable to 2006 levels.

The NAR forecast in four major commercial sectors analyzes quarterly data for various tracked metro areas. The sectors are the office, industrial, retail and multifamily markets. Torto Wheaton Research and Real Capital Analytics provided historic metro data.

Office market

There is a lag factor in the current office market to backfill space by tenants who moved into newly constructed space. At the same time, concerns about the overall economy are causing some tenants to put expansion or relocation plans on hold. These present a challenge to timely and cost-effectively lease space in older office buildings.

Since the level of new supply will be greater this year, office vacancies are expected to rise to 13.3 percent in the fourth quarter from 12.5 percent in the last quarter of 2007. Annual rent growth in the office sector is forecast at 3.5 percent in 2008, following an 8.0 percent gain last year.

Estimates for the first quarter show areas with the lowest office vacancies include New York City; Honolulu; Long Island, N.Y.; and San Francisco, all with vacancy rates of 9.4 percent or less.

Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, should total 38.5 million square feet in 2008, down from 57.3 million last year.

Office building transaction volume in 2007 totaled a record $211.0 billion, compared with $133.5 billion for 2006. Equity funds accounted for 40 percent of office investment last year. Foreign investors purchased a record $17.7 billion in office buildings last year.

Industrial market

Industrial activity remains strong in port and distribution hubs, with relative weakness around many manufacturing centers. International trade continues to play a pivotal role in industrial real estate.

Vacancy rates in the industrial sector will probably average 9.6 percent in the fourth quarter of 2008, up from 9.4 percent in the same period last year. Annual rent growth is projected at 3.3 percent by the fourth quarter, down from 3.6 percent at the end of 2007.

The areas with the lowest industrial vacancies include Los Angeles; San Francisco; Tucson, Ariz.; Salt Lake City; Orange County, Calif.; and Portland, Ore., all with vacancy rates of 6.1 percent or less. Los Angeles is expected to remain a landlord’s market for the next four to five years.

Net absorption of industrial space in 58 markets tracked is likely to total 134.7 million square feet in 2008, up from 120.2 million last year. Industrial transaction volume in 2007 was a record $46.0 billion, compared with $38.9 billion in 2006.

Retail market

The supply of new retail space is finally being held in check, although secondary markets might be growing because new space often follows population growth. As secondary and tertiary market populations continue to grow, it will become necessary to track those markets in addition to monitoring older retail centers.

Vacancy rates in the retail sector are expected to decline to 8.8 percent in the fourth quarter from 9.2 percent in the fourth quarter of 2007. Average retail rent is forecast to grow by 1.4 percent in 2008, compared with a 3.2 percent rise in 2006.

Retail markets with the lowest vacancies include Orange County, Calif.; San Francisco; San Jose, Calif.; Washington, D.C.; Las Vegas; Honolulu; and Los Angeles, all with vacancy rates of 5.9 percent or less.

Net absorption of retail space in 53 tracked markets is forecast at 24.8 million square feet this year, up from 11.1 million in 2007. Retail transaction volume in 2007 totaled a record $71.6 billion, up from $46.9 billion in 2006. REITs accounted for a quarter of retail transaction volume last year.

Multifamily market

The apartment rental market—multifamily housing—is attracting risk-averse institutional investors. Of the record $98.6 billion spent in this sector last year, 40 percent of acquisitions were from institutional investors such as pension funds and life insurance companies. Private investors were equally active, accounting for another 40 percent of transactions.

Many potential first-time homebuyers continue to rent, placing downward pressure on vacancy rates and upward pressure on rents. The number of new multifamily units remains relatively high, due in part to the conversion of condo projects into rental buildings, notably in the Washington, D.C., area and South Florida.

Multifamily vacancy rates should average 4.8 percent in the fourth quarter, down from 5.1 percent in the fourth quarter of 2007. Average rent is seen to rise 5.3 percent in 2008, up from a 3.1 percent increase in 2007. Multifamily net absorption is estimated at 245,800 units in 59 tracked metro areas in 2008, up from 234,400 last year.

The current national vacancy rate is 4.7 percent, below the 5.0 percent level, which is considered landlord’s market. The areas with the lowest apartment vacancies include Northern New Jersey, San Jose, Miami, Salt Lake City and San Diego, all with vacancy rates of 2.9 percent or less.

© 2008 FLORIDA ASSOCIATION OF REALTORS