Low interest rates in conjunction with a less-than-stellar equity market are still driving private investor capital into the commercial real estate market, says Timothy Welch, a top investment sales broker from Cushman & Wakefield. As a result, says Welch, the investment sales market is the hottest that it has been in two decades.

Yet the white-hot sales market stands in sharp contrast to what many still consider a fundamentally weak real estate market. After all, leasing demand for office, apartment and industrial properties remains flat in most markets as the labor market grows by fits and starts.

Managing Director Welch says his division is on a tear this year. He expects to negotiate $12 billion in sales in 2004, up from $7.5 billion last year. "Across the board more and more investors are willing to take a risk," says Welch. "Private investors — syndicators and groups of individual investors — are stepping up to the plate and buying properties which have vacancies or near term rollover."

REITs, pension funds, offshore investors, developers, investment managers and banks also are purchasing commercial real estate. Institutional buyers are gobbling up as much as they can, but typically don’t employ as much leverage as individual investors and private investors.

Welch identifies the nation’s hottest investment sales markets as New York City, Washington, D.C., Los Angeles and Boston. That’s hardly a surprise as New York and Washington have both drawn heavy interest from international investors in recent years. Newcomers to that list, however, are Los Angeles and Boston. Meanwhile, the Southeast and Southwest have experienced heavy demand for apartment properties.

Despite investor concerns that interest rates may start to rise noticeably, Welch expects the real estate market to remain "hot and competitive" for the balance of the year. Ironically, the benchmark 10-year Treasury yield has actually dropped in recent weeks from 4.28% on Aug. 13 to 4.23% on Aug. 28.

"The market is anticipating small increases in interest rates over the near term," says Welch. "But interest rates went up 50 basis points this summer and the real estate market is experiencing $1 billion in new listings in a week. That shows you things aren’t about to slow down."