MIPIM 2011: US investment focus to expand beyond gateway markets this year

A panel of US-based private equity real estate firms told the mostly European audience that US investment opportunities will move to a ‘second tier of core markets’ in 2011.

Investment opportunities for US real estate will move beyond the 24-hour international gateway cities due to the limited number of prime properties coming to market and the increasing amounts of capital pursuing those assets, according to US-based private equity real estate firms speaking at the MIPIM conference in Cannes Thursday.
Stephen Renna, president of the National Association of Real Estate Investment Managers (NAREIM), told an audience of mostly European delegates that the competing forces of the limited supply of high-quality, core assets coming to market and the wall of equity seeking such investments has resulted in heated bidding and premium pricing in markets like Washington DC, New York, Boston, Los Angeles, San Francisco and, to a lesser extent, Seattle. This yield compression will prompt a number of investors to look to a “second tier of core markets,” which include San Diego, Houston, Denver, Salt Lake City and Miami, he said.

The anticipated shift in investor focus was based on a survey of NAREIM’s members and seconded by the panel, which comprised Jeffrey Barclay, managing director at Goldman Sachs; Graham Bond, managing director at Cornerstone Real Estate Advisers; Peter DiCorpo, global chief operating officer at CBRE Investors; and Greg Winchester, managing director of TriMont Real Estate Advisors.

That assessment wasbacked up by a new report on foreign capital targeting the US from Jones Lang LaSalle. It stated that the targets markets of foreign capital are likely to expand from the top two US property markets – New York and Washington DC – to 10 major markets by the end of 2011.

“While most foreign investors sought comfort in the best performing US markets, such as New York and Washington DC, interest has begun to extend to five major US markets and, within 12 months, they will be interested in eight to 10 others throughout the country,” said Steve Collins, managing director of the international capital group at Jones Lang LaSalle. “While most international investors also have begun to target Boston, Los Angeles, San Francisco and Chicago, we think that Seattle, San Diego, Atlanta and Houston will be added to the mix for strategic purchases by the end of the year.”

Growing foreign investor interest, which is coming from overseas funds, life companies and private equity, is part of the reason for the increased competition for the limited supply of prime assets. “With increased competition for prime assets causing cap rate compression, foreign capital needs to lower their yield thresholds from seven percent or look to secondary markets to hit their returns,” added Jay Koster, president of the Americas capital markets group at Jones Lang LaSalle.