HOUSTON—Amid a still-plodding domestic economy, investorsstarved for yield are still looking for it in the safest place atthe moment: commercial real estate. So says the August edition ofTranswestern's monthly “The Briefing” report.

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“Both debt and equity markets remain highly liquid andcompetitive as commercial real estate continues to offer attractiveyield to income-oriented investors and opportunistic upside forthose investors looking for higher return and higher riskinvestments,” according to Transwestern's chief investment officer,Tom McNearney. He notes that the first quarter saw a 13.5%year-over-year increase in CRE sales on assets valued at $10million or higher, for a total of $74.1 billion intransactions.

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Most commercial product types reported higher salesyear-over-year for May, the report states. Sales of retailproperties increased 75%; office sales increased 17%; andmultifamily sales increased 11%. Industrial sales, however,decreased by 10% year-over-year for the month of May.

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Although unrest in Gaza, the Ukraine and Syria is creatingrecent market volatility, early Q2 indicators show continuedimprovement in the US economy, says Transwestern. The Q1 FDIC BankReport noted several positive signs. Among them was a decline inthe number of banks on the problem list from 467 in Q4 2013 to 411,with $216.1 billion in assets; and Y-O-Y improvements for 54% ofbanks.

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The Wall Street Journal this past weekend noted thestrength of the CRE sector, although it also took note of somepotential dark clouds on the horizon. On thepositive side, the Dow Jones US Real Estate Index, whose componentsinclude REITs as well as mortgage, realty and forestry companies,has climbed 92% since early 2009.

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“That gain, amid a rise of about 20% in the median price of newand existing homes over the past two years, is a bit less than the114% rise for the S&P 500 index,” according to theWSJ. “But it's an impressive recovery for a sectordevastated by a historic slump starting in mid-2007.”

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However, the WSJ cited a slowdown in the housingrecovery, as evinced by the most recent Case-Shiller Home PriceIndices from S&P Dow Jones Indices. The year-over-year increasefor May, as reflected in the latest monthly Case-Shiller reportlast week, represented the lowest annualized gain since February2013. On a monthly basis, home prices fell 0.3% in June, the firstnegative month since January 2012. “ "The first-time home buyer isjust not the factor that it once was," Peter Boockvar, chief marketanalyst at the Lindsey Group, told the WSJ.

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In the REIT sector, the current low-interest-rateenvironment is making real estate trusts among the highest-yieldinginvestments, according to the WSJ. That could change if interestrates begin rising, as is now an increasing likelihood. “Yields on10-year Treasuries climbed as evidence grew that the US economy hadfirmed, making a rate boost more likely,” the WSJreported. Further, REITs are considered expensive based on'adjusted funds from operations,' a widely used metric for valuingthese shares.”

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In the short term, the best performing REITs have beenhigher-risk. “Smaller, highly levered REITs with lower-qualityproperty portfolios [have] outperformed, Green Street Advisors'Mike Kirby told the WSJ. Longer term, the WSJreports that some analysts have rated larger, high-quality REITswith lower levels of borrowing “a better bet during the new periodof uncertainty.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.