LOS ANGELES—According to Marcus & Millichap's Q115 investor sentiment report, 68% of investors plan to increase their real estate holdings this year by an average of 15%, GlobeSt.com reported in an earlier story. As a result, the investor sentiment index rose from 179 at the end of 3Q14 to 187, a new record high. To expand on the report and shed some light on the economic drivers behind these historic confidence levels, we sat down with Hessam Nadji, Marcus & Millichap chief strategy officer and director of specialty divisions, for an exclusive interview. Here, he covers the drivers behind the investor sentiment, which geographic markets are getting the most attention, and how the global economy is playing a role. 

GlobeSt.com: What is causing this historic boost in investor confidence?

Hessam Nadji: This is a convergence of three things happening at the same time. One is that the fundamentals are improving, and there is more and more confidence in the market that occupancy gains are very soon going to generate very strong rent growth in office, retail and industrial. Apartments have already had several years of rent growth, but in all other property types, we are just now entering a period of very strong rent growth. The second factor is that aside from new construction, new supply is very limited. So, there is really nothing on the supply side that could derail recovery, and that is giving people a lot of confidence. Third, interest rates are still historically low, and even if they rise to some extent, which they are expected to do later on this year, we are coming up from such historical lows that the cost of borrowing money in light of these improving fundamentals and rent growth, is still very, very attractive. All of these things coming together is what is resulting in a 10-year high in sentiment.

GlobeSt.com: What about cap rates? Is that also a contributing factor?

Nadji: The icing on the cake is that cap rates are still very competitive compared to other uses of money and alternative investments, whether it is the 10-year treasury yielding 2.2% to 2.3%, or corporate bonds, or the stock market, which has now become more volatile. None of those vehicles compare that favorably to the kind of cap rate that commercial real estate provides, so it is still a yield advantage.

GlobeSt.com: Are you seeing this confidence more concentrated in certain geographical markets or property sectors?

Nadji: One of the most intriguing things about the sentiment is that most investors are looking to invest in secondary markets, not necessarily tertiary markets, but definitely secondary markets, because they are now convinced that job growth is broad and is affecting the smaller metros around the country. Therefore, the recovery in real estate should be sustainable there too. Secondly, lenders are now willing to lend more in secondary locations. The other trend related to that is value-add, where investors are willing buy older, more tired properties and take some more risk and add value through renovation or repositioning, and therefore generate higher yields. The lower yields in quality properties in the primary metros are definitely driving capital into secondary markets and value-add deals.

GlobeSt.com: Are you seeing this value-add demand more in certain property types?

Nadji: Apartments are still the least risky because you can gauge the tenant demand and make sure that you don't overimprove a property and make it too expensive. With office and shopping centers in particular, there is more risk involved. But, we are seeing value-add demand across all property types, including hotels.

GlobeSt.com: The report also mentions uncertainty in the global economy. Can we expect to see more foreign investors penetrating the US market this year?

Nadji: I think that there is no question that demand for commercial real estate is rising, especially among private investors that are becoming the middle class in China and Latin America. The wealth creation in China and Latin America in particular is more directly resulting in capital coming into commercial real estate in the US, really more than any other global factor. The more institutional types of foreign investors have always been relatively active in the US, especially in the gateway markets, and they remain very active. If anything, it has become a little more difficult for them because of the rise in the dollar, which is basically making real estate in the US more expensive. Nevertheless, they want to own the real estate, and it is legacy investment for the high net worth individuals and institutions. I don't see it slowing down any time soon; I actually see it continuing to increase.