{"id":1004133143,"date":"2015-12-04T13:18:07","date_gmt":"2015-12-04T21:18:07","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004133143"},"modified":"2020-04-21T02:54:48","modified_gmt":"2020-04-21T10:54:48","slug":"december-issue-warning-signs","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/december-issue-warning-signs\/","title":{"rendered":"December Issue: Don&#8217;t Miss these Investment Warning Signs"},"content":{"rendered":"<p>By Hugh F. Kelly, PhD, CRE<\/p>\n<p><a href=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg\"><img loading=\"lazy\" decoding=\"async\" data-attachment-id=\"1004126816\" data-permalink=\"https:\/\/www.commercialsearch.com\/news\/september-issue-economists-view-finding-your-financial-match\/economist_hugh-kelley\/\" data-orig-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg\" data-orig-size=\"800,543\" data-comments-opened=\"1\" data-image-meta=\"{&quot;aperture&quot;:&quot;2.8&quot;,&quot;credit&quot;:&quot;&quot;,&quot;camera&quot;:&quot;NIKON D700&quot;,&quot;caption&quot;:&quot;&quot;,&quot;created_timestamp&quot;:&quot;1283959151&quot;,&quot;copyright&quot;:&quot;&quot;,&quot;focal_length&quot;:&quot;112&quot;,&quot;iso&quot;:&quot;320&quot;,&quot;shutter_speed&quot;:&quot;0.0025&quot;,&quot;title&quot;:&quot;&quot;,&quot;orientation&quot;:&quot;1&quot;}\" data-image-title=\"Hugh Kelley\" data-image-description=\"\" data-image-caption=\"\" data-large-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg?w=800\" class=\"alignright size-medium wp-image-1004126816\" src=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg\" alt=\"Hugh Kelley\" width=\"300\" height=\"204\" srcset=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg 800w, https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg?resize=300,204 300w, https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg?resize=768,521 768w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a>Real estate is a residual product of the economy. It gains value when and where the economy is robust, as well as when and where the property contributes to productivity. When the opposite conditions prevail, they impair asset value. Boom towns\u2014such as those that sprung up recently in the North Dakota energy fields\u2014created residential rents that, for a time, rivaled those of the most expensive coastal cities. Yet that boom has fizzled, along with prices at the pump, and real estate values have quickly dropped back to earth.<\/p>\n<p>The limit case, of course, is the ghost town where the gold or silver mine has shut down, the population has left, and all the buildings have been abandoned. Nor is the West the only part of the country where you see this phenomenon. A tramp through the woods in upstate New York, rural Massachusetts or Connecticut sometimes reveals old forges, stone walls, and chimneys\u2014traces of long-ago habitation in places reclaimed by nature.<\/p>\n<p>I don\u2019t mean to be an alarmist, but it is sobering to remember that risk lurks in every real estate investment, and that risk is not evenly distributed across the American landscape.<\/p>\n<p>My thoughts were prompted by the latest data on investment. As this is written, we have data from <a href=\"https:\/\/www.rcanalytics.com\/Default.aspx?SessionState=-1\" target=\"_blank\" rel=\"nofollow\">Real Capital Analytics<\/a> (RCA) showing $375 billion in commercial property investment encompassing 23,341 deals during the first three quarters of 2015. The concentration\u2014and the dispersion\u2014of that investment activity are worth a thoughtful look.<\/p>\n<p>Some of the data seems to make perfect sense. For instance, in the office sector RCA tallied $108 billion of investment through September, 45 percent of it directed to primary cities. Secondary markets came out slightly ahead, accounting for 45.9 percent of total purchases (by price). But this is understandable, since major markets such as Seattle, Denver, San Jose, Dallas and Atlanta are typically classified as secondary. Although there are no performance guarantees, these are all metro areas with mature, diversified economies and significant stocks of high-quality buildings. Such markets are worth attention, especially from alpha-oriented investors who believe that astute timing and careful asset selection can provide superior yields at a time when primary markets are very richly priced.<br \/>\nIn the industrial sector, which attracted about half as much investment capital as the office sector\u2014$50.7 billion\u2014the geographic distribution of activity was different, yet still plausible. Primary markets like New York City, San Francisco and Washington, D.C., have largely post-industrial economic bases. It is not surprising to see primary metros capture just 18 percent of industrial property investment, while 65.5 percent is going to the secondary markets. The 16.5 percent share captured by tertiary markets, especially in the Southeast, reflects where the nation\u2019s light manufacturing and warehousing operations have moved to take advantage of better operating costs and logistical efficiency.<\/p>\n<p><strong>Wanted: Tough Questions<\/strong><\/p>\n<p>However, I believe that some other trends should give us pause. For example, what are we to make of the choices of hotel investors? Hospitality purchases during the first nine months of 2015 totaled $35.6 billion, with 61.7 percent going to secondary markets and an incredible 23.9 percent to tertiary markets. Since hotel demand stems from three major sources\u2014business travel, domestic tourism, and international visitors\u2014how can nearly a quarter of hotel acquisition capital flow to tertiary markets, where demand from all of those crucial sources must be regarded as thin?<\/p>\n<p>Retail acquisition patterns, too, raise serious questions. In an era where final demand is still lagging, and the shopping center market remains burdened with residual oversupply, how is it that tertiary markets commanded 26.9 percent of the $65.2 billion invested in the sector, while primary markets managed only a 15.9 percent share? Are we expecting a sudden reversal of urbanization trends? Are the sprawling, low-density towns and cities of America likely to be retail overachievers in an era where e-commerce is already capturing more than 7 percent of consumer purchases? What will generate the returns on retail property investment in tertiary markets over the next five to 10 years?<\/p>\n<p>Finally, it is time to question whether the apartment investment boom is getting ahead of itself. In 2014, there was more capital directed to the multifamily sector than at the peak of the housing boom a decade ago. By September, the $98.3 billion of rental apartment acquisitions had already matched the total for 2014\u2014and transactions usually surge during the final quarter.<\/p>\n<p>If there is a risk that \u201cNiagara of Capital\u201d conditions will return, when too much money surges into a property sector, that risk is most evident in multifamily. And 67.4 percent of that capital is going to the secondary markets: Dallas ($5.4 billion), Atlanta ($4.7 billion) and Phoenix ($2.4 billion). All three have long histories of overbuilding and intense competition for rental growth.<\/p>\n<p>Right now, the real estate markets are feeling very good. The consensus seems to be that we have a couple of years ahead before the threat of the next down-cycle. But it is during eras of good feeling that discipline and selectivity tend to relax. The data on capital flows should at least tell us that there are risks in spreading our nets too wide in search of lower prices and higher yields in the commercial property markets. Most often, you get what you pay for.<\/p>\n<p><em>\u2014Hugh F. Kelly, PhD, CRE, is a clinical professor of real estate with the NYU Schack Institute of Real Estate and was the 2014 chair of the Counselors of Real Estate.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Are risks and returns getting out of balance? <\/p>\n","protected":false},"author":1082,"featured_media":1004126816,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,21751,21742,21749,21684],"tags":[],"class_list":["post-1004133143","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-hotel","category-latest","category-retail","category-viewpoint"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v24.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>December Issue: Don&#039;t Miss these Investment Warning Signs - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/december-issue-warning-signs\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"December Issue: Don&#039;t Miss these Investment Warning Signs\" \/>\n<meta property=\"og:description\" content=\"Are risks and returns getting out of balance?\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/december-issue-warning-signs\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2015-12-04T21:18:07+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-04-21T10:54:48+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"543\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Hugh F. 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Kelly is the author, most recently, of 24-Hour Cities: Real Investment Performance, Not Just Promises (Routledge\/Taylor &amp; Francis).\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/author\/hughfkelly\/\"}]}<\/script>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"December Issue: Don't Miss these Investment Warning Signs - Commercial Property Executive","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.commercialsearch.com\/news\/december-issue-warning-signs\/","og_locale":"en_US","og_type":"article","og_title":"December Issue: Don't Miss these Investment Warning Signs","og_description":"Are risks and returns getting out of balance?","og_url":"https:\/\/www.commercialsearch.com\/news\/december-issue-warning-signs\/","og_site_name":"Commercial Property Executive","article_publisher":"https:\/\/www.facebook.com\/CPExecutive","article_published_time":"2015-12-04T21:18:07+00:00","article_modified_time":"2020-04-21T10:54:48+00:00","og_image":[{"width":800,"height":543,"url":"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/08\/economist_Hugh-Kelley.jpg","type":"image\/jpeg"}],"author":"Hugh F. 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