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Secondary and Tertiary Markets Begin to See Investor Demand
added: 2011-02-25

Investor demand for commercial real estate is slowly starting to increase in select secondary and tertiary markets, but it will be some time before most markets see significant improvement in price or rental growth, according to the CCIM Institute and the Real Estate Research Corporation (RERC).

“With the higher prices being paid for institutional-grade properties in top-tier markets, the sales volume of lower-grade assets in secondary or tertiary markets is increasing,” said Frank Simpson, CCIM, the 2011 president of the CCIM Institute and president of The Simpson Company in Gainesville, Georgia. “While Class B investment opportunities exist in all property sectors and will become more prevalent throughout 2011, some markets are still seeing little or no transaction activity other than distressed property sales.”

CCIM and RERC caution that many characteristics of a trifurcated market will remain in 2011, as the division continues between the top-performing properties, distressed assets, and those properties in the middle.

“Properties are moving,” said Simpson. “What is disappointing is that aggregate prices for smaller size properties are still declining on a size-weighted basis, particularly in smaller markets. Some of this is due to distressed property sales bringing down the average prices. But it also means that demand is just not there yet for many properties—or at least not enough demand to drive up prices.”

The apartment sector reflects where investors are putting their dollars. Total volume increased approximately 30 percent in fourth quarter 2010 on a 12-month trailing basis and approximately 50 percent on a quarter-to-quarter basis.

Total volume for the office sector increased by more than 40 percent from the previous quarter on a 12-month trailing basis, the most of any property type. The increase in volume and price occurred for property transactions of $5 million and above, indicating that the improvement is concentrated primarily for larger office properties in the major markets.

“Although investors are gazing out into the risk horizon in the stock market, they are still looking for safety for certain allocations of their investment dollars,” said Ken Riggs, CCIM, president and CEO of RERC and the CCIM Institute’s chief real estate economist. “And commercial real estate—particularly the apartment sector—is generally safer than stocks.

“CCIM members are more optimistic on return versus risk and value versus price. And although volume is up, particularly for larger properties, it’s disappointing that the aggregate price for smaller-size properties is not increasing significantly, particularly in small-town America.”

Source: Business Wire

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