While the economy didn't quite live up to a more robust recovery anticipated for 2011, more investment opportunities should present themselves this year, predicts Mesirow Financial.
The Chicago-based financial services firm says in its 2012 outlook that opportunities for investment exist, particularly in specific submarkets in the multifamily and industrial sectors.
While none of the individual property sectors have returned to their peak levels of activity in 2006-'07, multifamily has attracted a larger slice of the transactions, most likely due to improved fundamentals, greater debt availability and a lower perceived risk factor among investors.
Mesirow said that it anticipates that investment activity will continue to accelerate as the overall economy recovers further and debt markets continue to loosen up.
"As property fundamentals continue to improve, effective rental rate growth will follow improvements in occupancy," predicted Alasdair Cripps, a senior managing director of Mesirow Financial. "It is imperative that investors recognize not only what drives a property sector, but also what drives a particular market and submarket. After all, real estate is still about location."
"Current cash flow is the primary driver for valuations and the lending community," Cripps said. "Going forward, investors will need to rely on investment managers' operating acumen to identify value and to drive incremental cash flow growth. The days of relying on high leverage or cap rate compression to drive investment returns are long gone."
Also driving opportunities will be more debt availability, the company said. Lending sources continue to slowly become more available to owners and buyers alike across property sectors, but with lower loan-to-value ratios, higher debt coverage ratios and more stringent covenants such as repayment guarantees, than in the peak years.
The multifamily sector continues to have more liquidity, options and lower terms than the other property sectors; this can be largely attributed to the government-sponsored enterprises - Fannie Mae and Freddie Mac.
"The
commercial real estate finance market remains weak, although signs of improvement are beginning to emerge," Stephen D. Jacobson, a senior managing director of Mesirow reported. "Traditional bank financings, when available, are structured to meet conservative loan parameters, such as 75% or lower loan-to-value, 1.25% debt service coverage ratios and are limited to 5- to 10-year financing terms."
However, the lending community continues to be selective on asset type, location, vacancy levels and sponsorship. The commercial mortgage backed securities (CMBS) market remains tepid and involves maturities of 10 years or less and are structured according to conservative real estate lending parameters, Mesirow executives said.
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