Overseas Investors Accelerating CRE Property Price Gains

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Overseas investors are accelerating commercial real estate property price gains and increasing foreign investment dollars may continue driving the trend.

While global real estate investors continue to increase their flow of funds into commercial U.S. properties, the trend appears to be causing property values to increase at a much faster pace than if the same or similar properties were bought by local investors.

According to a recent survey, CBRE found that investor demand for commercial property continues to increase as 53% of surveyed global investors indicated they plan to increase their purchases throughout 2015.  New York, Dallas and Seattle all made the top 10 list of markets where that money will be targeted.

“The appetite for global real estate investment is increasing as more investors intend to deploy capital outside of their own region this year. Competition for assets is intensifying and many investors plan to move out the risk curve in search of higher yields, a trend that will result in a stronger focus on value-add and opportunistic investments,” said Chris Ludeman, global president of CBRE Capital Markets. He cited the current low interest rate environment, economic expansion across an increasing number of markets, and improving real estate fundamentals as the main reasons investors are continuing to favor commercial real estate.

Foreign investment in U.S. commercial real estate has been growing consistently over last six years, according to Deutsche Bank analyst Ashley Hooper. The volume of deals last year topped $49 billion, surpassing the 2007 peak investment level of $47 billion.

“This positive trend appears to be continuing; so far this year we are up 140% over last year,” Hooper wrote.

A big portion of the growth this year came in February when Singapore-based Global Logistic Properties Ltd. completed its acquisition of the former IndCor Properties for $8.1 billion. Assembled and sold by Blackstone, the portfolio was one of the largest logistics platforms in the U.S., with 117 million square feet of industrial properties spread across 29 different U.S. cities.

Canada was the leading global buyer of U.S. real estate last year with $9.7 billion of direct foreign investment, according to research from CBRE. And before January 2015 was even over, Canadian investors transacted a significant $2.75 billion in U.S. real estate deals.

The continued flow of overseas investment is helping to drive up property prices, according to a new jointly authored paper from three university researchers.

Yu Liu, a professor in the Department of Real Estate, J. Mack Robinson College of Business, Georgia State University; Paul Gallimore, a professor at the School of Real Estate and Planning, Henley Business School, The University of Reading in the United Kingdom; and Jonathan A. Wiley an associate professor also at Georgia State published the research.

Their study examines the capital value performance for commercial property sales made by nonlocal investors, both when they purchase a property and when they sell it. The research found that non-local, out of market investors overpay when buying commercial property by an estimated 13.8%, and sell at an estimated 7% discount.

They also found the under-performance in buying and selling property increases as the geographic distance separating investor and asset expands. Out of market investors fundamentally overvalue similar assets sold to each other relative to assets transacted between locals, and they are also less patient as sellers.

Using CoStar Group data, the authors analyzed 10,971 office purchases and 11,444 sales in 138 U.S. markets. Their analysis controlled for investor clienteles, timing, location and sale conditions. The three hypothesized several reasons why out of market investors may overpay for CRE.

  • They might have an information disadvantage relative to local participants
  • They may be disproportionately represented by tax-exempt and institutional investors who have superior access to reduced cost of capital, giving them more of an ability to outbid other investors
  • They may be represented by less sophisticated investor clienteles
  • The investors may be coming from cities with more expensive rental markets, which could be skewing decisions.

“Their thesis quantifies what many CRE professionals have suspected for years: that foreign buyers are liable to pay more than their domestic peers for U.S. real estate assets,” said Eric Hawthorn, director of research and communications at Llenrock Group, a Philadelphia-based capital markets firm providing real estate debt, equity, joint venture partnerships and advisory services.

“Since several gateway U.S. markets are among the top destinations in the world for international CRE capital, foreign investors pursue opportunities here extremely aggressively,” Hawthorn said. “Whether deployed for stability or returns, foreign capital is flooding into U.S. gateways in such quantities that it is skewing the valuations of upper-tier properties across asset types.”

According to Hawthorn, foreign investors appear to be competing with each other, rather than with their domestic counterparts, which may create a disconnect between properties’ operating income and the sums that foreign investors will spend in order to outbid their peers.

Source: http://www.costar.com/News/Article/Overseas-Investors-Accelerating-CRE-Property-Price-Gains/171326

 

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What’s in Store for Las Vegas Real Estate Following a Busy 2014?

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After years of being battered by the recession, the Las Vegas real estate market had one of its busiest years in 2014!

Though the housing market remained volatile, the year saw an increase in investor activity as new retail, apartment, and office projects were built in the suburbs.  The market also saw a spike in new project proposals and new construction along the Strip.

Can we expect these trends to carry into 2015?  To answer this question, we must first examine the progress that was made in 2014 and account for real estate insiders’ expectations.

Housing

After hitting bottom, Las Vegas home prices rose at one of the fastest rates nationally in recent years! The driving factor for this increase – investors paying cash, sight unseen, for low-priced houses to turn into rentals.

But now, with fewer bargains available, investors are pulling back. This, in turn, triggered a valley-wide slowdown in 2014 as more listings went ignored, sales volume dropped, and prices rose at a much slower pace.

Real estate pros expect things to keep cooling in 2015. But with the market relying more on regular, mom-and-pop buyers, that could turn a slowdown into a slump, as many locals face difficulties in securing mortgages as a result of tighter lending requirements and past bankruptcies, foreclosures, or short sales.

Meanwhile, homebuilders had a topsy-turvy 2014.

Sales totals dropped significantly as would-be buyers, saddled with financial woes and sticker shock, backed off. Through November, sales volume was down 20 percent year-over-year in Southern Nevada, prices were flat, and builders pulled fewer construction permits.

All told, there’s little reason to feel “warm and fuzzy” about 2015, Home Builders Research President Dennis Smith recently said.

But even as business slumped, developers laid out plans last year to build big. They revived massive projects that were derailed during the downturn including 1,700-acre Skye Canyon, in northwest Las Vegas; 2,700-acre Park Highlands, in North Las Vegas; and 1,900-acre Inspirada, in Henderson.

In 2015, developers likely will sell land there to homebuilders. But don’t expect a surge of new subdivisions anytime soon.

These days, builders typically break ground on a house only after they find a buyer. Given the current slowdown, getting a rush of customers at every project seems all but impossible.

Retail

The biggest story in Las Vegas’ retail sector last year was the opening in October of the long-delayed Downtown Summerlin, the 1.6 million-square-foot retail and office complex at Sahara Avenue and the 215 Beltway.

Previous owner, General Growth Properties, stopped construction in fall 2008 amid the national economic meltdown, leaving a steel skeleton off the freeway. Current owner, Howard Hughes Corp., a spin-off from General Growth, resumed work in 2013.

The mall opened with a four-day extravaganza of fireworks, live music, and food trucks. As of a few months ago, 69 percent of the retail space had been leased.

Meanwhile, Ikea announced plans last year to open its first furniture superstore in Las Vegas. The popular Swedish retailer is slated to open in summer 2016 at Sunset Road and Durango Drive, in the southwest valley.  Brokers say other retailers taking space around the valley include discount clothing shops, dollar stores, and quick-service restaurants.

Shopping centers also got hit with grocery-store closures, which could lead to a big drop in sales for other retailers in the plazas because of decreased foot-traffic.  Albertsons closed three locations last year. Also, Food 4 Less executives announced they were pulling the discount grocer out of Las Vegas by early this year.  They planned to close eight locations in the valley and convert six others to Smith’s Food & Drug stores. Both brands are owned by Kroger Co.

Office

Despite some progress, Las Vegas’ office market is arguably the most-struggling aspect of the valley’s commercial real estate industry.

Leases are being signed, investors are buying building,s and some office-users are expanding. But overall, the market, which was vastly overbuilt by speculators during the boom years, has a glut of empty space and flat rental prices.

The vacancy rate was roughly 19 percent in the third quarter of 2014, down from 21 percent a year earlier, and average asking rents have been stuck at about $1.87 per square foot since late 2012, according to Colliers International.

The office market’s recovery “is not pretty, but it is a recovery of sorts,” John Stater, Colliers’ Las Vegas research manager, said in a report last fall.

Sales prices, for instance, are not even close to those of the boom years, but they are rising for high-quality buildings. And while landlords haven’t cut back on the pot of money they give tenants for interior build-outs, some larger property owners are either raising rents or not budging much from the asking price, said broker Dan Palmeri, a director with Cushman & Wakefield Commerce Real Estate Solutions.

In recent years, tenants jumped at the chance to move into higher quality office space at bargain prices. So now, even though Las Vegas’ vacancy rate is high, “quality space is few and far between,” Palmeri said.

At the same time, development is a fraction of what it used to be but hasn’t stopped.  Perhaps the most notable office property built last year was the nine-story tower at Downtown Summerlin.  As of a few months ago, the tower was just 25 percent pre-leased, according to Howard Hughes.

However, the landlord hopes to soon finalize deals that would bring the occupancy to 50 percent and aims to have the building 70 to 80 percent filled by the end of this year, said listing broker Randy Broadhead, a senior vice president with CBRE Group.  The tower’s asking rent is $3.10 per square foot, well above the market average.  Construction is finished, but the first tenants won’t move in until April 1, Broadhead said.

Strip

Much of the ground-up construction on the Strip last year involved retail projects.

The Linq promenade outside the Flamingo opened, and other projects underway included Grand Bazaar Shops, in front of Bally’s, and a three-story shopping center at Treasure Island.

Investors haven’t given up on the corridor’s main cash cow, though. Australian casino mogul James Packer and former Wynn Resorts executive Andrew Pascal acquired the former New Frontier site in August through foreclosure and announced plans for a new resort. They did not release project details at the time but said they expect to start construction in late 2015 and to finish in 2018.

Plans for sports arenas also advanced, even though developers haven’t signed any teams. MGM Resorts International and sports giant AEG broke ground in May on a 20,000-seat arena just off the Strip. Also, former UNLV basketball and NBA player Jackie Robinson received county approvals in August for his $1.4 billion project on the north Strip.

Robinson’s plans have called for a 22,000-seat arena with retractable roof, a 44-story hotel and 16-screen movie theater, as well as nightclubs, a grocery store, ice rink and movie-production studio — a colossal undertaking for a first-time developer.

Overall, with megaresorts on the drawing board but not under construction, including Genting Group’s Chinese-themed property on the north Strip, “there really isn’t that much excitement in the market, in terms of development,” said Brent Pirosch, director of gaming consulting for CBRE’s global gaming group.

The north and south ends of the Strip still have plenty of vacant land, but Pirosch expects them to sit for a while until developers see how new projects on the resort corridor fare.

Source: http://vegasinc.com/business/real-estate/2015/jan/07/after-busy-2014-whats-store-las-vegas-real-estate/