US real estate is riding the crest of the wave now – the question is, for how long? This was the conclusion of speakers and delegates at the Pension Real Estate Association (PREA) annual plan sponsor real estate conference held in Washington DC last week.
Much attention was paid to the current economic environment, getting back to the fundamentals that underlie the real estate market. Real estate is not alone in contending with extreme liquidity, low yields, rising expenses and replacement costs, and growing risk premiums. It was also impossible to avoid the gloom in the housing sector, as sales of both new and existing housing stock continue to decline and prices plummet. However, the news from other investment sectors was not as grim.
There was a general consensus that multi-family was "flying high." Rentals are booming fuelled by key current demographic trends – the echo boomers (children of the baby boomer generation) who are moving out on their own and into apartments, and also recent waves of immigrants who start out in apartments. In terms of development, class A apartments in some markets can prove to be a development opportunity, especially since raw material costs, particularly for lumber, have fallen from their post-Katrina highs.
In the office sector, occupancy is well up, and although rents are at their lowest for around 40 years, some real rent growth is starting to be seen, particularly on the coasts. This means that capacity has levelled out after the overbuilding of the last decade. However, caution remains the byword, noted Mary Ludgin of Heitman, who pointed out that there is a risk of ego-driven building.
The challenges facing the industrial sector could create opportunities. Much current warehouse space is badly outdated and needs either dramatic improvement or rebuilding to meet current size demands and the need for flexibility. Warehouse building is cheap and quick to put up, and if the location is right, near key transport hubs, then there is good value there.
That said, the market is highly competitive at the moment. There is increased interest domestically from institutional investors who want to increase their real estate allocations, although this amounts to a continual inflow rather than a flood, noted Nori Gerardo Lietz, managing director of the Pension Consulting Alliance. There are also significant inflows from offshore market, betting on the dollar.
Some American investment managers noted that for the most part, non-US investors seem disinclined to invest in US markets at the moment. The difference in returns between US real estate markets and many European and Asian markets has evaporated, and in addition, many foreign investors believe that the value of the dollar will continue to fall, noted Charles Wurtzeback, managing director, North America and Property CEO of Henderson Global Investors. Among Europeans, Germans are net sellers at the moment, although there is significant interest from Ireland, Greece, Spain and the Middle East.
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