Delegates at this year’s MIPIM conference in Cannes were warned to consider artificially low interest rates in the US before investing in the country’s core property markets.
Zeb Bradford, chief investment officer of Seattle-based boutique real estate investment bank Metzler Real Estate, told delegates at the annual conference that, in his experience, investors were “piling in” to core markets across the US “purely for yield.” However, he cautioned that the country’s interest rates currently are low for political reasons, not market reasons, and that could result in poor performance.
“We’re operating in a very artificial interest rate environment, which has been dictated by government policy and is not market driven,” Bradford said. “When you’re looking at an investment purely for yield purposes and you’re not considering that at some stage those interest rates are going to be released up to some sort of market level, you run a real risk of loss.”
Currently, the benchmark interest rate in the US is at a record low of 0.25 percent, far lower than the 6.45 percent average between 1971 and 2010. Bradford added: “To me, that is where the greatest risk lies today, especially for those piling into core, and people truly are piling in at this stage.”
Bradford’s assessment of core investment appetite was further substantiated by Chris Ludeman, president of the US capital markets team at property services titan CBRE. Ludeman reported that there was $210 billion invested in US real estate last year, and he predicted that figure could be closer to the $300 billion mark in 2012, with much of those assets reflecting core characteristics.
Indeed, Albert Behler, president and chief executive officer of Paramount Group, the New York-based real estate investment group that was launched in the 1960s to represent the interests of Germany’s Otto family, said core buyers were becoming so plentiful in the US that they are even moving more meaningfully into secondary markets “in a very material way,” particularly as values return in gateway cities and the market becomes crowded. According to research he presented on stage, offices, for instance, had recovered 58 percent of their value on average since May 2009, although they are still off their peak by some 8.3 percent.
While most buyers of US real estate are US and Canadian investors, Ludeman noted that increasing foreign investment would occur. In addition, when these groups begin to look at core properties in secondary US markets, they most will likely invest via sponsors – in other words, fund managers.