We are in an extraordinarily low yield environment with sub 5% caps rate on office and retail and sub 4% cap rates on multifamily in top tier cities. 5-year BB junk bonds are now returning approximately 3.5%. Many investors have a cost of capital that does not allow them to tolerate such low returns and are likely to be forced up the risk ladder. We expect more activity around transitional assets in top tier cities and a pricing lift in core assets in some secondary markets
With the CMBS market running efficiently, all-in rates for 70-75% leverage for core assets in secondary markets are sub 4% right now. With high single digit cap rates, even after amortization, investors are receiving mid-teens cash-on-cash returns for these acquisitions. Those metrics should lead to a price lift in secondary markets in 2013.
AFIRE released their annual survey of global cities in which foreign investors say they will invest - and the top five are New York, London, San Francisco, Washington, DC and Houston. It is the first time American cities dominated the top five. San Francisco and Houston are viewed as favorable markets to due growth in their respective strengths in the high tech and energy sectors.
While there are reports that a housing recovery is emerging, there is data that suggests investors are largely fueling the surge in purchase activity. Since the first quarter 2009, there has been no positive movement in the homeownership rate, and despite home sales activity trending up (20% since 1Q2009), mortgage lending activity for homebuyers is down (-17% during the same period). Conclusion: investors are driving the housing recovery, not the renters, thus demand for apartment units remains strong.