Wednesday, August 4, 2010

Trophy Markets

MIT Center for Real Estate reported a nearly record setting jump in prices for investment grade U.S. commercial real estate in the second quarter. Though sales remained stagnant, investor demand for stable, high quality assets greatly increased; amounting to a 17.3% increase in prices for properties sold by major institutional investors.

David Geltner, director of research at the Center for Real Estate, made this statement in relation to these events:

“High investor demand for safe investments [is] pushing prices sharply up from the deep bottom for “trophy” buildings- prime properties fully leased out to solid tenants”

This coincides with a recent trend of higher price points reached by net leases. However, it has less to do with “trophy buildings” than “trophy markets” with high investment rated tenants. Net leases in populous urban areas are in the perfect position to take advantage of the demand for stability in today’s market.

For further illustration, here is some recent activity witnessed by Calkain:

TD Bank
1515 15th St. NW, DC
Sale Date: March 2010
NOI: $301, 606
Sales Price: $4,300,000
Cap Rate: 7.01%

3130 Lee Highway N. Arl, VA
Sale Date: July 2010
NOI: $500,000
Sales Price: $7,300,000
Cap Rate: 6.85%

Blue Cross Blue Shield
8896 SW 136th St. Miami, FL
Sale Date: On Market
NOI: $468,815
Sales Price: $6,378,435
Cap Rate: 7.35%

The areas these assets are located in (Washington DC and Miami) continue to experience prosperity today. Furthermore, the above properties are located within some of the best parts of those urban centers; ensuring stability and demand. Because of this, investors are willing to pay heavily for “trophy markets”.