Investor demand for top buildings in major U.S. markets is driving property prices so high that returns may be limited, said Jeff Blau, chief executive officer of Related Cos.
Buying at low capitalization rates, a measure of investment yield that is net operating income divided by purchase price, may make exiting investments “hairy” and refinancing a challenge, Blau said today at the Bloomberg Link Hedge Funds Summit in New York. In markets such as Manhattan, there is “tremendous” demand for high-quality real estate, he said.
“With interest rates low and everybody chasing yield, you’re driving asset prices up,” said Blau, whose New York-based company is the developer of Manhattan’s Time Warner Center and Hudson Yards project. “When you start buying at 3 and 4 cap rates, where are you going to go from there?”
Demand for top-quality buildings helped commercial real estate prices rise in April above an August 2007 record, according to Green Street Advisors Inc., a Newport Beach, California-based research firm that measures values based on property appraisals. Another gauge, the Moody’s/Real Capital Analytics Commercial Property Price Index, regained 51 percent of its peak-to-trough losses as of March, the latest available data. That measure is based on repeat-sales transactions.
The resurgence in the market for commercial-mortgage backed securities is helping to fuel demand, Blau said.
“For stabilized assets, the CMBS market is wide open and as frothy as it’s ever been,” he said. “There’s no liquidity problem. It’s a very, very competitive market.”