Good News Friday

The Next Shoe to Drop

The dollar volume of direct investment in commercial properties soared by 77 percent in the first quarter of 2011 compared with the first quarter of 2010. Last year, the market was depicted by a barbell with investors focusing on core properties in primary, supply constrained markets at one end, and distressed assets priced for a quick sale at the other end. Attracted by

higher yields, investors now are taking a fresh look at properties in secondary markets and properties below the trophy threshold. Real Capital Analytics reports that secondary markets captured some of the biggest gains in first quarter volume compared with the year-ago quarter, including Minneapolis, Oakland-East Bay, Phoenix, Seattle, and – most surprisingly – Detroit. These markets, along with the primary markets of San Francisco and the District of Columbia, saw Q1 investment volumes at least double from the same quarter a year ago. Other key first quarter trends:

· Cap rates for industrial property sales fell by 50 basis points in the first quarter to 7.7 percent. Cap rates for other property types were flat or up slightly, a sign of the increasing volume of non-trophy sales. Source: Real Capital Analytics

· Outstanding levels of distressed assets were essentially flat in the first quarter compared with the fourth quarter of 2010 on the heels of a 4 percent decline between the third and fourth quarters of last year. This suggests that the level of distress may be topping out. Source: Real Capital Analytics

· First quarter returns for direct property ownership totaled 3.36 percent, the fourth consecutive quarterly increase of the current recovery cycle. The return included two components: 1.52 percent from income and 1.84 percent from appreciation. Source: NCREIF

· Publicly traded REITs returned 6.8 percent in the first quarter, beating the 5.4 percent return posted by the S&P 500. Sources: NAREIT, Bloomberg

This is a pretty good performance for an asset class that, 24 months ago, was called “the next shoe to drop.”

Have a great weekend.

Best regards,


Robert Bach

SVP, Chief Economist

Grubb & Ellis



About CRE Northwest

Specialist in office & investment real estate in Seattle & the Eastside
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