Debt and equity capital remain plentiful and relatively cheap for most borrowers for most acquisitions in most markets. The CMBS market is trending upward as well. Competition for deals remains fairly intense. Underwriting disciplines remain strong, but are starting to erode ever so slightly, which always happens before they start to slip more aggressively.
Development is beginning again in many urban markets, but funding still appears to be a bit constrained for some property types. Money seems to be flowing freely for multifamily development. Funding for development of other property types in the process of loosening up, too.
Speaking of multifamily, the apartment sector continues to perform, but some markets are drawing record low cap rates — sub-4 percent in some markets. Are we at or nearing a peak? Divided opinions abound.
Looking at the other types in the four main food groups: Industrial property market values may be impacted by the expansion of the Panama Canal. Continued economic recovery bodes well for continued industrial property dynamics. As consumer spending continues to rise, the retail sector continues to surprise and outperform.
Office properties in the world’s financial capitals continue to trade at record pricing. Now pricing for offices located in suburban and secondary markets are beginning to gather strength. Contrarian players are beginning to target tertiary markets and suburban markets of secondary cities, anticipating eventual cap rate compression as wholesale capital once again returns to flood these markets.
Oil patch markets — Bakken, Permian, Eagleford Shale — are all booming and attracting risk capital in larger and larger quantities. The question is the sustainability of these fields. As oil and gas reserves have risen, prices have steadily fallen. At some point, the cost/benefit tradeoffs become prohibitive, and demand for commercial and housing stock wanes along with drilling and extraction activity. There’s a lot of money to be made, but a lot of volatility assumption goes along with it.
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Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.
