It seems particularly fitting to be blogging on the commercial and multifamily real estate market now, during the same month as the Presidential (and Vice Presidential) Debates. While this is a time of uncertainty for many voters as they listen to the ebb and flow of the debates, the commercial and multifamily real estate market always seems to contain at least of bit of uncertainty to mid-market investors and property owners. With that in mind, our goal here with our blog is the same as our overall company focus – to provide institutional-quality support for mid-market investors.
What does this mean to you? Our specialized market intelligence identifies the best practices and strategies to give private building owners and investors what they need to be successful. In other words, we try to provide clarity in an uncertain marketplace.
No market likes uncertainty, whether the stock market or the commercial real estate market. Once the Presidential election is over next month, one element of that veil of uncertainty will be lifted, and we will all have a clearer idea of what to expect in the four years ahead concerning job creation, tax policy, public and private debt markets and overall demographic drivers. Investors will be looking for any indication that job growth will pick up steam, resulting in greater demand for multifamily, retail, office and industrial properties.
That said we see a new sales cycle beginning to form in the mid-market segment, spanning regional markets from New York to Boston. This cycle is being formed by a confluence of factors, with three key drivers:
- Historic low interest rates
- Tight supply/increased demand
- The flight to quality
Let’s take a look at each of these factors and see how they contribute to that new sales cycle.
Historic Low Interest Rates
With the cost of money at nearly an all-time low and the return on other investments largely failing to keep pace with inflation, investors are seeking opportunities to “beat the market” and real estate has become a key strategy in their portfolio growth plans. We see this continuing as rates remain extraordinarily low, with fixed rate loans available now below 4% for investment real estate acquisition. To give us certainty in this trend, the U.S. Federal Reserve has promised to keep ultra-low interest rates into 2015.
Tight Supply/Increased Demand
The law of supply and demand remains a key tenet of the commercial and multifamily real estate market. There are simply not as many properties available today as there were five years ago, and better properties can go to contract and close very quickly. This lack of supply is due to a number of factors, including the fact that owners cannot find good alternative investment vehicles to move into after they sell a property. We are also seeing institutional capital back in the game after sitting out for the past few years, and foreign investors are increasingly seeking U.S. investments. All of these factors result in greater competition around available properties for sale.
The Flight to Quality
Uncertainty about the overall economy drives the flight to quality as investors move capital away from risky investments and toward safer investments. As Wall Street has been roiled by uncertainty about the Euro, high unemployment rates and other negative factors, stock market returns are much more risky and volatile. At the same time, Treasury bills and bonds offer a very slim return on investment. Hard quality assets, like commercial and multifamily real estate, can offer a much better return on investment, even when factoring in possible increased operating costs and property taxes.