Investors Should Look for Opportunities in Niche Markets
DALLAS, Nov. 15 /PRNewswire/—The experts have spoken, and a real estate
market correction is widely anticipated for 2006. Despite a continuous flow
of capital into commercial real estate in late 2005, many of the biggest
investors have sold assets. Amid so much uncertainty, what should real estate
investors expect in the coming year and how can you protect your portfolio?
Real estate advisor Dean Macfarlan, who has been successfully tracking
real estate trends for more than two decades, offers insight to the current
market state.
“We’re seeing the highest prices paid for core assets that we’ve seen in
20 years, and most people see a correction coming,” Macfarlan said. “But, even
a 20 percent correction won’t produce a meltdown, just a flat year.
Opportunities will exist for investors in 2006 if they know where to look,
have knowledgeable counsel and allow enough time to let their investments
mature.
Macfarlan offers the following three tips for investors seeking to balance
and safeguard their portfolios in 2006 with investments that yield, healthy,
long-term returns.
Move Away from the Core
Investors need to be much savvier about where they’re putting their money
in 2006. Macfarlan advises investors to move away from the kind of asset that
has been considered “core” commercial real estate—trophy properties in top—tier markets.
Too much capital has been chasing too few good deals for too long, with
hedge funds, private-equity groups, and rich investors all bidding up the same
properties. Yields on some high-quality properties are now 5-6 percent.
“Investors putting money into commercial real estate with this kind of return
would be better off in bonds,” he said.
office towers, retail and multi-family properties are mostly overpriced. Even
warehouses and industrial buildings in primary markets are no longer the sure-
thing they were a year or two ago.
Macfarlan identified three strategies for real estate investment in 2006
that he believes will produce quality returns:
“Private Residence Clubs emerged as a marquee investment niche in 2005,”
he said. “We made investments in properties in Scottsdale, Tuscany, Exuma and
all are performing ahead of pro-forma. And it has only just begun.”
Macfarlan said Private Residence Clubs have just a 2-3 percent market
penetration so they offer tremendous room to grow, particularly among Baby
Boomers with cash to spend on luxury. “We’ll do more investing in PRCs in
2006,” he said.
Macfarlan also turned to less coveted markets and often overlooked
properties. Macfarlan made off-market investments in Atlanta, St. Louis,
Tulsa, Oklahoma, as well as investing in properties owned or leased by solid
companies emerging from bankruptcy. These deals required a greater degree of
due diligence, but the work paid off with higher returns than similar
properties would have in top-tier markets.
And, Macfarlan made the first of a series of investments in healthcare
properties in 2005, acquiring a surgery center and medical office building.
Future investments could be in elderly housing, outpatient surgery centers or
hospitals, where barriers to investment are high and demand is booming.
“Build In” Building Costs
Although many people are only just beginning to take notice, the catalyst
for a downturn in real estate next year could be the steep rise in the cost of
building materials. Construction costs have skyrocketed 30 percent in the
past nine months as the housing boom created shortages of labor and materials
like lumber and concrete. The rebuilding of 632,000 homes in New Orleans
pushed lumber prices up 50% in some areas just three weeks following hurricane
Katrina. Additionally, the high price of oil, needed to produce everything
from roofing to PVC piping, has contributed to the price increase.
The impact of these price increases will show up first in speculative hot
spots like Miami and Las Vegas, where developers are pre-selling properties at
what seems like a high profit. But they won’t be able to build them for the
prices they’re now getting, and many developers will be stuck with the bill.
The proverbial “bubble” could burst here first and be felt across the nation.
Keep Your Eyes on the Horizon
Investors should be prepared to weather a correction by leaving their
money invested long enough to realize healthy returns. “With a longer horizon,
people will weather the storm and make money,” he said. “If you are investing
for the short term, 2-3 years, 2006 may be a bad year to invest.”
Macfarlan said commercial real estate is now recognized as a fourth asset
class, attracting capital comparable to stocks and bonds. And, while returns
on commercial real estate in the short term may be unimpressive, the same will
be true for stocks and bonds which experts predict will yield a modest 6-7
percent return over the next 5-7 years.
“A market correction doesn’t mean that there won’t be opportunities in
2006,” he said. “But investors will need better guidance in finding niche
investments, anticipating rising costs and keeping realistic investment
horizons.”
About Macfarlan Real Estate Investment Management
Macfarlan Real Estate Investment Management is a national real estate
investment management firm which has purchased over $800 million in real
estate investments on behalf of pension funds, Wall Street investment funds,
family offices and individual investors. The company’s unique offerings
include income, value-added and opportunistic investments. Macfarlan provides
investment programs with superior returns through targeted strategy funds,
single asset partnerships, and tenant-in-common ownership structures. The
firm acquires and develops office, industrial, healthcare, and luxury
hospitality properties located across the United States and abroad. For more
information please visit: http://www.macfarlan.com.