LOS ANGELES-Real estate capital will head in new directions in 2007, according to one of the industry's longtime students of commercial real estate. Stan Ross, chairman of the board of the University of Southern California's Lusk Center for Real Estate, calls 2007 the “Year of Recycling” for real estate capital.
Ross explains that capital is not leaving property markets, but it is “being recycled into small equity funds, limited partnerships and alternative investments.” A good part of what's happening with capital this year is an outgrowth of last year's privatization push, in which some of the largest public REITs went private, according to Ross.
Ross cites New York and Los Angeles among the “leading metropolitan markets” where properties will continue to command top dollar. In addition to investing in traditional office, retail, industrial and hotel assets, investors are going to be taking a closer look at alternative investments including urban infill, adaptive reuse and multifamily-retail developments near inner city transit centers, Ross says.
Despite the disappearance of some of the largest REITs, the capital that was fueling their growth is still around and it wants to remain in real estate, according to Ross. He says that some investors who previously had been targeting public REITs “will shift to smaller private equity funds and hedge funds as well as limited partnerships, joint ventures and direct investments in niche properties.”
Many of the former REIT shareholders cashed out with big payouts when the REITs were acquired, so those investors have plenty of capital to recycle into other types of investments, Ross explains. "Although prices have increased on investment-grade properties, investors can realize competitive returns on second-tier properties,” Ross advises, adding the caveat that location still plays a crucial role.
Despite the recent trend toward privatization, Ross believes that public REITs will remain a mainstay for institutional investors and that the industry will generate some public offerings even with the trend toward privatization. He notes that REITS have outperformed the stock market for the past five years, a performance that institutional investors will continue to take into consideration.
Foreign investors also will remain active in US markets, Ross believes. He says that US property prices look competitive from a global perspective, and he observes that, "The weak dollar also has given global investors more buying power in America."
Investors in 2007 will still have access to the inexpensive debt of recent years, which will enable them to continue to build their portfolios at a cost-of-capital that leaves room for potentially higher returns than other types of investments offer. With these factors at work, the USC Lusk Center chairman says, real estate “will continue its dominance as an asset class in 2007."