Capital Markets Outlook
Moderate office development activity in most markets, combined with an incredible inflow of capital from new sources wanting to invest in U.S. office properties, has resulted in competition for transactions and pressure on pricing, at a scale never before seen, according to speakers at the first session of NAIOP’s inaugural O.CON, The Office Conference, held at the JW Marriott Houston on June 24 and 25.
“For the first time in a while, we have a lot of things in balance that are working out really well,” reported Collete English Dickson, principal, transactions, Prudential Real Estate Investors. Dixon joined Sean Bannon, managing director and head of U.S. real estate, Zurich Alternative Asset Management LLC; Greg Kraus, director of North American acquisitions, Invesco Real Estate; and Al Pontius, national director, commercial property groups, Marcus & Millichap, in an invigorating, interactive discussion that explored a wide range of topics.
Key takeaways from the session, which was moderated by Marc Renard, vice chairman and executive managing director, Cushman & Wakefield, include the following:
- An unprecedented amount of foreign capital from the Asia Pacific region and elsewhere is chasing a limited number of office properties, as funds are growing at “incomprehensible” rates, Kraus noted.
- “Real estate reacts more to the availability of capital than the cost of capital,” said Bannon. “What’s really, really healthy about where we are now [in the current economic cycle] is that the first 10 to 15 minutes of every discussion we have is about risk. That’s common among institutional investors today.”
- Capital is moving beyond gateway cities to chase yield. “There’s plenty of capital producing liquidity in secondary and even tertiary markets,” as well as in suburbs, commented Al Pontius. He pointed out that, looking beyond large transactions involving trophy properties, 77 percent of the properties that sold for between $10 million and $25 million were in suburban locations. “That’s one metric that really points to the expansion of where office capital is aimed,” Pontius said. He added that “tertiary [markets] trump the majors by a very, very, very wide margin,” in terms of the number of transactions taking place.
- Demographics matter. Investors are looking to cities and metro areas experiencing strong employment growth, particularly among the millennial generation: places like Portland, Oregon, Seattle and the South of Market area of San Francisco. Those areas also are experiencing strong rent growth. Kraus noted that while the number of millennials moving into urban cores is “still under 20 percent,” that 20 percent is more affluent than the rest of its generation. “You have to be very pragmatic. This is where the opportunity lies.”