"I would say the market is overvalued,
based on historical comparisons of prices per square foot," said
Wayne M. Brandt, managing director of real estate finance for RBS Greenwich
Capital. "Cash flows are being overvalued by investors who
The Real Estate Research Corp. has concluded that investors are currently looking for an average 11 percent internal rate of return on all property types, ranging from 13.3 percent on hotels to 10 percent on multi-family rental properties.
They may be looking for an 11 percent IRR, but the RERC study show that
investors are currently willing to accept going-in capitalization rates
averaging 9 percent, with multi-family rental properties (7.8 percent)
and hotels (11 percent)
Experts say that the increase in prices and decrease in returns can again be attributed to the lowest interest rates in recent history. Do the numbers — on big properties, the internal rate of return can be more satisfying than the stock market.
Inspired by these impressive returns, institutional investors decided they needed real estate in their portfolios. These investors joined the bidding war, competing with investment trusts, foreign investors and wealthy individuals looking for a tax break. As a result, it pushed up prices up even further, and limited returns.
Money Magazine notes that across the country, institutional real estate sales — from hedge funds, overseas investors, to private equity funds and partnerships — surged 50 percent to $180 billion. They also noted that the commercial mortgage market rose 10 percent to $2.2 trillion.
At this period in the investment cycle, real estate has become the venture of choice, creating a market that favors sellers.
Around Santa Monica, properties that have been owned for 20 to 25 years are being sold for 10 times appreciation.
"Now is the time to take that profit and reinvest in other deals," said C. Frederick Wehba, chairman of private investment firm BentleyForbes. "It's such a great time to be selling."
A national survey of commercial real estate investors by Marcus & Millichap Real Estate Investment Brokerage Co. found that nearly two-thirds of commercial real estate investors expected the economy to be stronger a year from now, compared with 37 percent who felt that way in 2004. Nearly 75 percent of them plan to boost their real estate investment over the next 12 months by a median of 17 percent, compared with 13 percent in last year's survey.
PNC Real Estate Finance also predicts that real estate will still be
a money magnet in 2005 — if yields on bonds and other types of assets
this year continue to look less attractive.
* Jodi Summers’ column Days on the Market runs every Wednesday in the Santa Monica Daily Press.