HFF's Cruz Sees Strong Demand Across Asset Types for Remainder of Year

FLORHAM PARK, NJ—Commercial real estate investment activity so far this year has been robust across the board, says José Cruz, senior managing director, HFF, and demand for hard assets is likely to continue throughout the rest of the year.

To date, 2015 has been different from years past because we are seeing investment activity in all product types – multifamily, retail, industrial and even office,” Cruz tells GlobeSt.com exclusively.  “In prior years, the activity was mainly driven by multifamily given the stability of the asset class and the year-long leases which allowed for rent increases in an expanding economy.”

Through June 2015, multifamily continued to dominate, says Cruz, with expectations for a record year in transaction volume. 

“In New Jersey, we have completed more than $600 million according to Real Capital Analytics,” he says.  “Given the amount of property currently being marketed, combined with deals already under contract, the volume is expected to surpass total year 2014 sales by more than 10 percent.  At this point in the cycle, we are seeing a significant amount of new rental construction, but not enough to derail the train as the lease up of those new projects is being absorbed at 20 to 30 units per month on average. As a percentage of the overall inventory, the amount of multifamily under construction is only three percent.”

Cruz says that retail has been one of the biggest surprises of 2015, with cap rates reaching a record five percent and “best of the best pricing in the mid fours on a cap rate basis.” 

“Per square foot pricing in some unique locations is more than $600 per square foot,” he says. “Grocery-anchored centers are still first and foremost on the institutional shopping list, but power centers are also reaching cap rates in the low fives.”

The office market is seeing renewed interest in leasing after some very lean years when absorption had been negative, says Cruz. “In 2015, investors are pricing assets with term, credit, and quality in the mid-five percent cap rate range or better, and pricing on a per-square-foot level is well over $400,” he says.  “As a result, there continues to be capital for value-add office space with per-square-foot pricing being the key driver for the private investors, which have surpassed institutional owners in the bidding for these deals.”

There is not enough industrial product to satisfy institutional and private investor demand, says Cruz.  “When a well-located asset is made available for purchase, the pricing is generally well north of $200 per square foot, and the bidding war to win the asset is five to eight investors deep on average,” says Cruz. “The buyers are placing similar value on stability as they are on near-term lease rollover, which will allow them to raise rents and add value.”

A combination of abundant capital in both equity and debt markets, potential interest rate increases, and a strong general demand for real estate assets instead of stocks and bonds could drive real estate sales volume to new heights and return thresholds to record lows, says Cruz. 

“We are seeing capital outpace product in general, and this will result in partial interest purchases allowing the current owners to stay in the deals and still capitalize on the strength of the current market in New Jersey,” he says. “Finally, New York City and Philadelphia also continue to improve and trade at record pricing, which is helping to drive increased demand in both northern and southern New Jersey.”