The commercial real estate market won big in the new tax plan, but brokerages say it will be a challenge to convince owners to sell. Valuations have been largely flat over the past few years, so owners are looking for credible reasons other than value appreciation to sell.
- Apartment valuations have flattened out in recent years
- Suburban value-add deals are gaining momentum fast
- Investors are still pumping significant capital into the apartment sector
Now that apartment property valuations have flattened out, investors and brokerages are looking for convincing reasons for owners to list their properties. “If you bought in 2010, or 2011, or 2012, you hit your pro forma in two or three years,” says Blake Okland, head of Newmark’s Apartment Realty Advisors arm. “The next guy is going to take five-to-seven years. So we really need to be able to entice these guys to sell.”
Brokerages and investors need more new listings to keep up with capital pouring into the industry, but many owners are wary to sell without significant financial incentive. Okland thinks the apartment sector will see an uptick in off-market deals over the next year as investors approach owners with individualized proposals.
The industrial and logistics commercial sectors are booming right now with some of the highest returns in commercial real estate. Multifamily is still competitive, however, as it maintains its status as an industry leader in size and investment.
“If I want to be in real estate, logistics and the industrial sector is the darling right now, but it’s a fraction of the size of multifamily,” says Brian McAuliffe, head of CBRE’s institutional apartment sales platform. “When we look at the amount of capital – foreign, domestic, private – who want apartments, it’s as robust as ever.”
Another big change to commercial real estate is the shift towards suburban assets. Investors have been targeting suburban value-add deals in recent years to offset the lack of value appreciation in traditional apartment properties.
“The big trend we saw in the second half of 2017, was the drive for current yield,’ McAuliffe says. “Investors can’t bet that the market will bail them out with lower cap rates and appreciation.”
Suburban apartment development is growing and presents ample opportunity in current market conditions, says Josh Goldfarb, co-head of Cushman & Wakefield’s multifamily investment sales platform.
“In the last few years, you’ve been able to find an early-2000’s vintage property, throw some new stainless steel stoves in, and the sky’s the limit. Now, that’s getting played out. And the rising rents are justifying new development,” Goldfarb says.