The economic environment has become increasingly complex for real estate investors, especially those who are local, to navigate.
Competition is coming from out-of-state, which is leading to a fight for practically every deal. That means local investors need to challenge their assumptions on buying and selling decisions, including the returns they’re hoping to achieve.
“The short-terms returns might not be what investors are accustomed to because of the competition pushing the values higher and the returns lower,” says Joseph V. Barna, a principal at Cushman & Wakefield |CRESCO Real Estate. “Those whose immediate return isn’t what they hoped it to be should look past that to where it’s going to be in the next few years and how that’s going to impact the investment.”
Smart Business spoke with Barna about the state of the Greater Cleveland real estate investment market and the need for investors to adjust expectations in the face of increasing competition.
What macro factors are fueling the current real estate investment market?
Many economic indicators point to strong fundamentals in real estate. On a broad level, those include strong consumer spending despite high inflation, household balance sheets in overall great shape, excess savings that’s supporting ongoing spending, job growth, and increases in wages and earnings.
Additionally, leasing is strong in just about every sector. In the industrial sector, annual rents are increasing anywhere from 2.5 to 5 percent per year. And because of the lack of space and high demand, landlords are achieving those increases, which in turn is increasing the value of property.
On the flip side, the war in Ukraine, labor shortages across sectors, fuel prices, continued supply chain and COVID-19 issues, increasing inflation and rising interest rates are causing historically compressed cap rates to slightly increase.
How are individual sectors performing?
The multifamily and industrial sectors are on fire in the investment market. Both are up some 70 percent compared to where they were two years ago. There are also certain niche investment areas that are hot, such as R&D, life sciences, affordable housing, senior living and medical properties.
The office market is gradually recovering with the central business district lagging behind the suburban market. The remote and hybrid work strategies will continue to put a drag on the office sector. Where there’s a lot of interest in office is in the newer, amenity rich greener office buildings. So, there is opportunity in the market for those who invest selectively.
In retail, the smaller suburban centers and mixed-use centers are doing well. Smaller boutique suburban centers look as if they’ll continue to be strong while bigger box traditional retail is going to continue to decline in large part because of the rise of fulfillment centers, which is a reality that’s here to stay.
What does the investor playing field in the Greater Cleveland market look like today?
There are high-net-worth individuals playing the investment market, as well as family shops and private equity. While Greater Cleveland has always had its local players, increasingly, regional, national and even global investors are looking into the Cleveland market, largely because real estate investment markets everywhere have been so hot and competition has been significant. This is driving investors into second and third-tier markets. So, when a property comes on the market, it doesn’t take too long before an offering memorandum gets out and there are interested buyers at practically all levels.
High investor demand and extremely low supply means you need to gather information, move quick and be prepared for a multiple offer situation. But while the market complexities have made investing difficult, there’s no better time than now to maximize your value on a sale. ●
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