Investors Balance Risk and Return

Whether they are located in top-tier cities or secondary markets, commercial real estate investors share some common ground when it comes to being cautiously optimistic and weighing risk, according to a new report published jointly by Real Estate Research Corp., Deloitte, and Real Capital Analytics.

High-quality properties are fetching unprecedented prices in a few select markets and interest in some secondary and tertiary markets is on the rise. Yet despite these positive signs and commercial real estate’s increasing stability and transparency, the still-fragile economy, anticipation of upcoming debt maturity, and sluggish employment growth continue to hinder investment, according to Expectations & Market Realities in Real Estate 2011 – Balancing Risk and Return in an Era of Uncertainty. 

“The overriding question is how do we account for the risk in this environment?” asks Kenneth Riggs, CCIM, president and chief executive officer of RERC and chief economist for the CCIM Institute. “When you look at the price of some of the properties that have sold during the past few quarters, you need to wonder how is the market measuring risk in this recovery cycle, what lessons have we learned, and will we get it right this time around. Given what we have been through during the past few years and the heighted aversion to risk, why are some investors willing to pay so much for some properties?”

Matthew Kimmel, valuation leader for Deloitte’s real estate services practice, agrees and notes that investors are looking for equilibrium in the market. “The flight to quality and to core markets versus the rest of the market seems to indicate that investors —- while still averse to risk —- are seeking a balance between risk and return.”

Transaction activity continues to build as capital flow increases, pushing the market forward, adds Peter Slatin, associate publisher at RCA. “However, the momentum of that forward movement could be choppy, as overarching economic and political concerns at home and abroad pull the market in different directions. Still, the top sphere of the market has strong support and there are indications of a spillover moving out beyond the country’s most vibrant markets and highest-quality properties —- and investors are increasingly aware of that movement,” Slatin says.

Despite the continued risk and uncertainty, commercial real estate may be “getting it right” from an investment standpoint, the research team concludes. Increased transparency in the industry and relatively strong performance as an asset class bode well for investors as the sector recovers. “Risk is a very important matter to contend with in this uncertain environment, but returns are available for investors who use tools to assess and balance the risk and return,” Riggs adds.

Source:  CCIM

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