After several years of broad-based increases in commercial real estate sales activity, rapid appreciation and cap rate compression, changes have emerged, creating a bifurcated market. Sales of smaller properties (less than $10 million) have dropped by as much as 30% from peak in some property segments and to a lesser extent for mid-range properties (priced at $10 to $20 million). At the same time, sales of larger, top-tier properties (priced at $40 million and above) have increased by as much as 50% so far in 2007 compared to the same period last year.

These trends reflect a more cautious outlook on behalf of private investors who in recent quarters have become concerned about the degree of price appreciation over the past few years, historically low cap rates and the prospects of a slowing economy. On the other hand, institutional investors, which have structurally shifted toward raising their real estate allocations, are concentrating their acquisition activity on larger, top-tier properties in primary markets. Another factor behind the increase in larger property sales is the privatization of large (major) REITs, mergers and the spin-off sales that have followed them. Lastly, larger private investors who have built up significant equity over the past few years are consolidating their equity out of multiple, smaller properties, to larger, more institutional properties. Many of these private investors are baby boomers who are getting closer to retirement and their priority is shifting toward wealth preservation and income.

The common theme throughout the majority of the marketplace is strength in valuation. While the rate of appreciation for smaller properties has slowed significantly, pricing pressures and cap rate compression are common for top-tier assets. Class B and C properties are experiencing more of a pricing gap and have seen a moderate increase in cap rates as a result, particularly in secondary and tertiary markets. Improving property fundamentals in most sectors, balanced new construction and healthy rent growth are supporting values and will continue to do so. As prices stabilize and net operating incomes improve over the next 12 to 24 months, cap rates will move up moderately but are unlikely to return to their long-term averages in the foreseeable future, since there is no cause for deep discounting of real estate prices.

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