This is Why Demand in CRE is Back

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More capital investments from foreign investors buying CRE in bulk is spurring the market. This, coupled with low interest rates and increasing valuations, is causing a big uptick in the number of CRE transactions. In fact, for the first three months of last year, big dollar “commercial real estate transactions increased by 45%.” Those numbers, while more volatile over 2016, are still showing positive signs for CRE investors, buyers, and sellers.

 

Buyers are Looking for the Good Stuff

What was discovered in a survey conducted by Real Capital Analytics is that the strongest demand is for the most highly sought after and desirable commercial real estate properties. The pool of potential investors is much tighter than the general real estate market so buyers are buying multiple properties at once.

Buying multi-million dollar properties in bulk results in enormous discounts for the buyer; causing investors to buy more rapidly throughout the primary and secondary CRE markets. Those looking to invest in the industrial and office sectors are drawn to places like southern California and New York City where sales prices for some of the most prime office space is over 30% higher than it was at the height of the housing boom before the bust in 2008.

 

Diverse Portfolios Yield Bigger Returns

Keep in mind however, that buying office space or even industrial space alone will not yield high returns. What investors are seeing is that the more diverse portfolios are reaping the biggest rewards. In fact, in Manhattan, an office building will give you a return on investment, but that return has dropped by over 4% over the last year, to the lowest it’s been since before the housing collapse.

That’s one of the reasons why bulk transactions for some of the best commercial real estate are rising so rapidly. Foreign investors make up a large portion of the commercial real estate investment market. They are snapping up properties that, on their own, would not yield a good return, but as part of a group of commercial assets which includes prime office space in downtown San Francisco, for example, will fetch a pretty penny.

 

Demand for Industrial CRE is Going Up

In a climate where this past January commercial properties sold for more than 15% higher than in the year before totaling close to $140 billion, the idea that demand for industrial space is forecasted to keep going up is welcome news.

Demand in turn is increasing the value of these diverse and often top of the market chunks of commercial real estate. Hotels are surging in conjunction with office space. All predictions point to a continued increase as the number of new construction projects continues to lag behind existing CRE sales.