Investors have yen for real estate

Secondary U.S. markets are catching fire with investors as total office sales rise nearly 8% in the first three quarters. The commercial mortgage-backed securities market could reach $40 billion this year.

Move over, New York (and Chicago and Los Angeles). Real estate investors have their sights set on secondary cities and rents are rising accordingly, Bloomberg News reported Monday.

Real Capital Analytics Inc. found that 31% of real estate transactions this year have taken place in secondary and tertiary markets (cities other than New York, San Francisco, Los Angeles, Washington, Chicago and Boston). That's up eight percentage points from 2011.

Capitalization rates, which measure yield by dividing net operating income by sales price, in those cities are on the rise. In the first half of 2012 the average for secondary and tertiary markets was 7.7%, up from 6.3% the year before.

Investors looking for higher yield assets in a period of historically low interest rates are increasingly turning to commercial real estate, often beyond the nation's coastal hubs.

Real Capital's data show that office sales nationwide in January through September rose 7.7% from a year earlier, to nearly $48 billion, Bloomberg reported. If transactions for Manhattan's Worldwide Plaza and several other big-ticket properties go through, 2012 may close out with a deal volume of more than $70 billion. That would be the best year since 2007's peak of $212 billion.

Banks are issuing more securities backed by commercial mortgages. In September alone they issued $6.9 billion worth, the highest amount December 2007, Bloomberg reported. Total commercial mortgage-backed securities may reach $40 billion this year.

Primary markets, New York included, are also showing signs of life. Office prices in the six largest cities rose 16% in the first half of 2012 from the same period of last year. According to Cassidy Turley's Manhattan office market report for October, Manhattan rents are also rising. September's average asking rent was $56.52 per square foot, a 62-cent increase from August. That figure is still a far cry from the city's peak, which was $67.06 in May 2008.

Source: http://www.crainsnewyork.com/article/20121008/REAL_ESTATE/121009908