BEVERLY HILLS, CA-Being an avid Bosox (and Dodger) fan it was wonderful to see the Sox win the series in Beantown after 95 years. The great Yogi Berra would no doubt have a perfect saying for what I believe 2014 will look for investors: "Déjàvu all over again." Given what is happening on a macro and public policy level, it appears likely that 2014 will be much like 2013, with a few nuances.

In this economy, carefully managed by the Federal Reserve, with Janet Yellen about to take the helm (who is basically Bernanke 2.0, only more dovish), many financial analysts opine that interest rates will stay low longer, perhaps until unemployment hits 6% according to Rosen Consulting Group. In this scenario, 10-Year Treasuries hover around 2.5% - 3.0% and cash will likely continue to be plentiful with debt remaining relatively cheap. The spread between treasuries will remain historically wide, which should continue to keep cap rates low. With inflation in check and interest rates low, fear takes a back seat to greed. Investors, hungry for yield, will venture further out on the risk spectrum as they look for inefficiencies where they can optimize risk adjusted returns. This places a premium on product and submarket knowledge and expertise. Management, development, and operational expertise will be key differentiators for investors seeking stronger yields. From a capital source perspective, foreign capital demand for U.S. real estate is global and looking for a variety of opportunities, not just trophy. Trophy properties and large office building and portfolio dispositions grab headlines and interest from foreign capital because they have sizzle and are an efficient way to allocate large amounts of capital. Trophy properties also generally facilitate capital preservation which is first and foremost on the agenda for core investors. This intense demand for core and core plus properties, which is fueled by oceans of money chasing a desert of offerings, has pushed property values to frothy levels.

Foreign capital and pension funds are also becoming more aggressive along the value add spectrum. Traditionally focused on core and core-plus investment profiles, these buyers are diving deep into the value add space, driving up pricing in markets with strong employment and economic growth.

Value add opportunities continue to be in very short supply. Investors are employing "second circle" and "A/B" strategies; scouring for opportunities in markets where employment is driven by intellectual content, energy, and educational (ICEE) companies. These companies are less rent sensitive because their business models are revenue focused, as opposed to the financial service, insurance and real estate related entities (FIRE) which are income focused and therefore highly sensitive to rent.

Cheap debt enables erstwhile sellers to hold for recovery. Investors must broaden their horizons and modify their investment criteria to enable them hit some singles and stay in the game until the market “normalizes”. Everyone wants the off-market opportunity, but there is little reason for a seller to commit without clear market price discovery. Auctions and open bids dominate the transaction scene as financial engineering with accretive debt structures are back. Some investors are finding success with unique redevelopment opportunities and specialty niches that require strong property level and submarket expertise and an ability to marshal capital to move very quickly. 

There is plenty of capital for distressed properties; however, due to the lack of urgency on the part of lenders to sell in markets with compromised fundamentals, supply continues to be tepid. Investors, even for distressed properties, need to underwrite optimal execution to be successful in winning bids.

All asset types are seeing intense demand. Office dominates due to transaction size, with multi-billion dollar deals occurring in L.A. and New York. Multi-family continues to be the darling product class, driven by demographics, employment dynamics and cheap debt. Retail remains the Wild Wild West purview of private capital with its smaller scale, a variety of product types and lack of geographic ownership concentration. Triple net sales continue to dominate transaction volume as private investors look for alternative safe investments to CD's and passbook savings. Industrial also continues to be in high demand; however, it is very nuanced with the REITs and pension funds dominating the big box sector and more entrepreneurial funds and private capital exploiting niches.

Although the public appears to be tiring of an obstreperous congress that is holding the economy hostage for political maneuvering, until there is clear direction on which way policy shakes out, most economists feel that there will not be much of a course change in interest rates or GDP growth for some time.  A case can be made (Barron's 10/27/13) that GDP could remain below 2% for quite some time. If that is the case and inflation stays in check, it appears likely that investors, armed with buckets of money and access to cheap debt, will continue to venture out on the risk curve in 2014 as they search for quality risk-adjusted returns.

The foregoing is the sole opinion of Fred Córdova and does not necessarily reflect the views or opinions of Kennedy Wilson or ALM.