Mark Knopfler probably didn't have commercial real estate in mind when he and Dire Straits crooned "I wanna live on solid rock" in their hit "Solid Rock" from 1980.
But that is exactly what investors are looking for as volatility and uncertainty continue to haunt commercial real estate participants in their search for solid ground.
As one fund manager put it, "all the money is in trophies and trash." If you add apartment properties to the list, he couldn't be more right.
Plenty of money is rolling into commercial real estate, but most of it is concentrated in areas where investors feel they have found solid ground.
Solid ground as defined by the "trophy" standard would be Pennsylvania Avenue in Washington or Fifth Avenue in New York City. Solid ground as defined by the "trash" standard would be a distressed situation where prices have hit rock bottom.
Apartment properties are the third area of "solid ground" and are particularly interesting to investors as population and demographic trends tilt heavily in the property type's favor.
Current trends supporting apartments are population growth and a larger percentage of new households as renters combined with a lack of new supply.
The country typically creates 1.3 million to 1.4 million new households each year of ongoing population growth. But in the past two years, despite continued population growth, fewer than 800,000 households were formed, indicating pent-up demand for new households.
In addition, a growing number of newly formed households are renting versus buying.
Homeownership in the country was 66.5 percent in the fourth quarter of 2010, according to the U.S. Census Bureau. The last time it was that low was the second quarter of 1998.
Recent data from the Census Bureau indicate declining rental vacancies.
In the fourth quarter of 2010, rental vacancy in the country was 9.4 percent — the lowest recorded vacancy rate since the first quarter of 2003.
Life insurance companies and pension funds interestingly are aggressively pricing apartment loans today and, in many cases, cheaper than Fannie Mae and Freddie Mac.
Aggressive pricing also is available on most commercial loans.
Five- and 10-year commercial mortgage rates are now in the 4.75 percent to 5.75 percent range for stabilized properties at a leverage level of approximately 65 percent to 75 percent, according to the John B. Levy & Co. Commercial Mortgage Survey. Lower leverage transactions price lower.
Attractive financing rates are a product of lenders searching for ways to earn more than what investing in Treasuries provides.
Signs indicate investors are looking beyond gateway or core markets to gain better yields.
That is a natural progression in the mending of the commercial real estate market and, in the past, the Richmond metro area has benefited from yield-hungry investors coming to the area.
Several office portfolios are under contract to be sold, and several apartment projects are in the process of being sold.
In addition, solid leasing activity is taking place for large blocks of space. The Richmond brokerage community is in agreement that business has picked up.
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