INVESTMENTS

INVESTMENTS

The improvement in the real estate investment market that began in late 2012 continued throughout 2013.  Investors continue to look for opportunities for positive returns from real estate investments compared to other alternatives.  This trend is expected to continue in 2014 as real property fundamentals are expected to remain strong and there are still a lot of investors sitting on the sidelines waiting for the right opportunity.  The biggest restraining factor to increased activity is a lack of inventory.  Sellers are reluctant to let go of their assets for the same reasons others are interested in acquiring them.  It often takes external changes to motivate sellers to put their properties on the market.

There are several factors that will keep the investment market active.   The improvement in commercial real estate combined with the lack of new construction is causing the market to shift to the landlord’s favor and with fewer vacancies rents will be increasing.   The “trophy” properties in the major markets are gone, so investors are having to look for opportunities in the secondary and tertiary markets.  The rise in the cost of new construction makes existing properties more attractive to tenants.

The improving market conditions caused cap rates to compress nationally.  According to Integra Realty Resources, national capitalization rates now range from 5.76% to 8.01% depending on the property type.  In Wichita, the benchmark for returns on real estate investments continues to be 10%.   Single tenant properties occupied by a strong national business will have a cap rate around 6%, while the return for a Class “C” retail center will be 12% or higher.  Multifamily continues to be an attractive investment property type both nationally and locally.  With vacancy rates under 8%, rents are starting to escalate and housing trends, especially for young professionals, should keep the demand for multifamily properties strong.  The tight inventory and expected demand is triggering new construction but the market is expected to be able to absorb the new inventory without hurting existing properties.  Prime office buildings were also attractive to Wichita investors as four properties were sold to different buyers.

FORECAST

Real estate will continue to be attractive to investors.  Lack of inventory, however, will continue to limit the volume of sales activity.

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