CHICAGO—As reported yesterday in GlobeSt.com, DTZ just released its report on US investment activity in the third quarter and found that volume reached $66 billion, bringing the rolling annual volume to $270 billion, a post-crisis record. Researchers found that a big share of the activity in eight top markets such as Chicago, Manhattan and San Francisco came from cross-border investments, and there are signs that investors' interest in secondary markets has perked up, a continuation of trends seen over the summer.
Still, in some places there seems to be a reversal. Foreign investors, for example, have started avoiding cities like Houston and Washington, DC. In the latter's case, John Wickes, the Chicago-based head of Americas research at DTZ, tells GlobeSt.com that “the leasing fundamentals are weak there. Investors don't see the opportunity for rental growth.”
And although Manhattan has attracted $25 billion of investment in the past twelve months, the most of any market in the nation, the improving economy has spread the wealth around the top core cities. Sales in San Francisco reached $18 billion in the same period, a 69% increase on a year ago. The tech sector has been so active, and its future so bright, that Wickes expects investors will keep hunting for deals in the city, even with all of the competition. “It's not going to end anytime soon.”
But all that competition has other consequences. If buyers want get solid returns, “you need to start looking outside the core,” says Nigel Almond, head of capital markets research at DTZ.
“I think that as cap rates compress people get squeezed out of markets,” says Wickes. And Almond adds that “German investors could have a certain threshold for yields,” pushing many into those secondary or tertiary markets.
However, “many of these investors will still pursue assets in spite of low cap rates,” according to Wickes, which should help maintain the pace of investment in the top core cities. Some of this interest can be attributed to the fact that what is considered a low cap rate in the US may not be low to an overseas buyer. Cap rates in Asia, for example, can hover around 3%, says Almond. And for many Asian investors, “when they can pick up something at 4%, that is still attractive for them.”
Both Almond and Wickes think investors in US commercial real estate will continue putting up good numbers in the fourth quarter. “I wouldn't be surprised to see a new record,” says Almond. Interest rates remain low, he points out, and investors have raised a record amount of capital, about $150 billion so far, to target US real estate.
“We're going to see a lot of activity in the fourth quarter,” says Wickes.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
