Investors To Accept More Risk in 2011

CHICAGO-The fourth quarter this year can be seen as a bonus, as capital investment in the first three quarters, nearly $60 billion, already surpassed all of 2009, according to a recent Jones Lang LaSalle bulletin. Though it’s true capital is still chasing core-market deals, those will dry up and hungry investors will start going after secondary markets, the company claims.

Contrary to fear of a possible double-dip recession, in Q3 overall US investment sales volume for the four main property types totaled about $26 billion, the highest quarterly total in two years, according to JLL figures. The current investment pace is at 2002 levels, says Josh Gelormini, a VP of research at the company.

“There’s so much capital out there waiting to get invested,” he tells GlobeSt.com. “Where volumes stand, we’re back to an area before where the credit bubble started to inflate. We expect that in 2011, investors will be comfortable with taking incrementally higher risk. For the super core markets, there just won’t be enough product, and they’ll start looking at properties that are less than prime and secondary markets.”

While in the trophy buildings in New York City and Washington, DC there have been a few instances of cap rates reported to be in the mid- to high-4% range, at the opposite end of the spectrum, there is also a very large and still expanding universe of properties in some sort of distress that will need resolution, said Peter Nicoletti, managing director of the company’s Special Asset Services division. “Although the current outstanding level of troubled and REO apartment, industrial, office and retail properties appears to be leveling at approximately $120 billion, forced sales will continue to be a significant feature on the capital markets landscape.”

More than $1.6 trillion in commercial mortgages, and construction and development loans, held by lenders are scheduled to mature through 2014, and the vast majority of these maturities lie with commercial banks said Tom Melody, executive managing director of the firm’s Real Estate Investment Banking business. The list of problem bank institutions continues to grow, and these bad commercial property legacy loans will continue to pose challenges for the banking sector through at least 2012, he said. “Lenders now hold over $33 billion of REO inventory that has resulted from this cycle,” Melody said.