Nervous Stock Market Investors Turning To Real Estate

Real Estate Research Corporation’s Investment Ratings for the institutional apartment and central business district office sectors each jumped a full point during the second quarter 2010, making them the two highest-rated property types that the RERC surveys.

The Investment Conditions ratings are based on a scale of 1 to 10, with 10 being higher and most favorable.

For the apartment sector the rating increased to 7.1 during the second quarter 2010 from 6.1 during the first quarter. The Investment Conditions rating for the Central Business district Office Sector increased to 6.0 during the second quarter, up from 5.0 for the first quarter.

“These high ratings reflect the increased investment prospects we are seeing for commercial real estate in general,” said Ken Riggs, RERC President and CEO. ” Institutional Investors skittish about the slowing economy and the volatility and risk exhibited in the stock market are finding the diversification, stability and higher absolute returns of the Commercial Real estate Class increasingly attractive.”

Although the apartment sector, long recognized as the commercial property type that generally possesses better risk-versus return characteristics, has often presented an investment conditions rating higher than those for other property types RERC rates, it has not had a rating this high since second quarter 2001, when the rating was 7.4 on the same scale.

Basically, that means apartment investments are proving to be safer bets during slowed economic times and are meeting the strategic initiatives of most investors.

“I wouldn’t say the apartment sector is  recession-proof, but it is the sector that is regarded as most safe  and also seems to garner the most demand when times are tough, whether it is in this recession or the last one.

With the lack of household formation during the past few years and tightened lending standards for single-family homes, consumer demand for apartments will continue to increase. The relatively low risk associated with this sector as compared to other property sectors, makes it an attractive investment.

The desire to minimize risk appears to be part of what is attracting investors to the Office Market, too, according to Riggs, ” Investors in the office market may have a higher degree of investment fortitude, pursuing higher returns and betting on the future of Commercial Real Estate.

” The market for high-quality Office Property has become as competitive as I have ever seen it, and as a result, we are seeing some of the highest prices ever paid for top properties in the top-tier markets. Interestingly, bidders on said properties consider such properties fairly low-risk and seem to be willing to pay almost any price to add them to their portfolio.”

Credit to RERC…founded in 1931…thank you for your research

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1 Comment

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One response to “Nervous Stock Market Investors Turning To Real Estate

  1. Gary Smith

    I would find it rather hard to believe that apartments are considered safer than other sectors of commercial real estate, especially when you consider that single tenant net leased properties are the most recession-insensitive assets available. Particularly in the Pharmacy sector (Walgreens, CVS/Caremark and Rite Aid)

    There leases tend to be guaranteed by investment grade tenants for 10-25 years!! What apartment rents are guaranteed that long? Answer: NONE

    Single Tenant net leased property owners have absolutely zero responsibilities in terms of operating the asset, not so with apartment ownership. You (The Landlord/Owner) bear ALL the operating expense!

    Lastly, in a soft economy, renters tend to double up in apartments, thus causing huge vacancies in some classes. Furthermore non-recourse financing is available and usually the norm with Single tenant net leased properties, versus recourse financing most often associated with multifamily financing.

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