Market for Investment Remains Strong

NEW YORK CITY-Despite low cap rates, the haggling in Washington over the budget and Affordable Health Care, and the unrest around the world, every day we still continue to hear news of the successful completion of real estate transactions for every form of property; commercial, residential, land and development rights. We see it in New York and in most major areas across the country. Even investors priced out of trophy properties in major metropolitan areas like New York are now seeking B class properties in tertiary markets and class C properties in secondary markets.

Moreover, we are not only experiencing a broad based recovery for new real estate investments, but also a decline of the CMBS delinquency across all markets. Not too long ago, the expectation was that 2013 would bring the nadir in the CMBS market because it was five years from Lehman's collapse and many lenders dealt with the economic crisis by merely extending the term for five years. The expectation was that a trillion dollars in financing was going to mature this year with no way to refinance the debt because the CMBS market had not yet recovered. No one could have predicted that the delinquency rate for CMBS loans fell for the fourth consecutive month with $1.7 billion in new delinquencies in September—a 32% drop from the $1.9 billion in loans that were delinquent in August. Overall, the delinquency rate fell for all properties types (industrial, hospitality, multifamily, office and retail) from the 10% recorded a year ago, to 9.65% three months ago, and to 8.14% in September.

Generally, this amazing recovery is a direct result of low interest rates; the absence of alternative investments; the flight of investment capital to the US for safety; and the expectation that the US will still likely have a strong dose of inflation due to Federal Reserve's actions since 2008 to restart an ailing economy. This strength in real estate has even triggered buying in the office market, where not too long ago the concern was dealing with too much office space as companies downsized and more people were able to work from home or other remote sites due to the digital economy. However, the loss of larger tenants taking huge amounts of space has been replaced by a vast number of smaller tenants—a safer approach since the loss of a tenant does not have as drastic affect on a landlord or its lender.

This recovery is not just evident in the acquisition of existing properties, but is also seen in the purchase of sites for new development.  Assemblages with land and development rights are being sold for prices that provide the developer with incredible returns without having the risks associated with development. And investors looking to develop are having no trouble finding the debt and equity needed to immediately demolish the existing buildings.

The strongest segment of the market continues to be multi family housing notwithstanding excess construction of homes, which is what led to the market collapse in 2006 and 2007. However, with no new construction since 2008 and a growing population, housing is essential. This is especially true in New York City, Boston and Washington, where growing economies and young families have absorbed all the rentals and created a boom in the development and conversion of condominiums.

In all, the real estate market has rebounded well from the collapse and is now once again the most active segment for investors.

Stuart M. Saft is a partner at Holland & Knight. The views expressed in this column are the author's own.