Miller: Secondary cities
will gain.

DENVER-Private, direct real estate investments and publicly listed property companies represent the best investment prospects in 2013. So says Emerging Trends, the annual study conducted jointly by the Urban Land Institute (which is holding its annual fall conference here) and PwC. The press got a peek into the report Tuesday morning, and the prospects are good for investment, despite the looming risk of the economy missing a step.

As reported earlier, the tone of Wednesday morning’s press briefing was upbeat with an asterisk, acknowledging the ongoing threat of the so-called fiscal cliff and European woes, while emphasizing the slow but relentless economic recovery. “The enduring low-gear real estate recovery should advance further in 2013,” the report summarizes.

Investment-grade bonds rated only fair in the comparison, along with CMBS. GlobeSt blogger and principal “Trends” author Jonathan Miller referenced the chase for yield as one of the prime drivers of the market next year. “Cap rates have plunged into uncomfortable territory in A markets,” he noted. That will continue to push investors into secondary and tertiary cities.

“Core real estate seems overpriced,” the report states. “Plowing money into top properties at sub-5% cap rates looks unproductive, especially if and when interest rates inevitably do go up.”

If you push into those secondary markets, plan to fail unless you hook up with a local operator, Miller warned.

Other trends that, well, emerged from “Emerging Trends” are the greater likelihood of an overheated multifamily market, though Miller noted that it’s still the industry’s darling. And then there is what he termed “unprecedented changes in Tenant Demand,” including the post-recessionary focus Stephen Blank on less space and a growing interest in “anything near rail,” which is space that’s “golden” to commute-conscious tenants.

In terms of the capital markets, ULI’s  noted that lenders will still be playing extend and pretend next year although they are expected to provide more stringent underwriting. Insurers, mezz lenders, CMBS and commercial banks will all benefit as investors continue to retool and get busy.