Direct investment in private equity capital in commercial real estate properties - from apartment buildings to regional shopping malls and downtown office buildings - is expected to increase slightly over the next 12 months. This insight results from a recent survey of investors by EquityCity, the online marketplace for commercial real estate investing.

The survey of more than 1,000 high net worth individuals, real estate developers, private equity groups, institutional investment advisors, opportunity funds and other accredited members of EquityCity's online marketplace revealed a continuing bullishness about commercial real estate.

In fact, less than one fifth of investors surveyed indicated that they are less bullish on commercial real estate investments over the next 12 months. Forty percent are more bullish over the next year, while 40 percent see next year as a continuation of the last 12 months.

About half of the investors surveyed intend to increase their allocations of capital to direct real estate investment over the next 12 months. Forty percent of respondents intend to maintain their current allocation to real estate and only 10 percent intend to cut back their allocation to the sector.

“While this real estate up-market has enjoyed a long run, our investor members are clearly still performing detailed due diligence on specific markets and opportunities,” said Matthew Blumberg, president for EquityCity. “From the real estate entrepreneur’s perspective, the good news is that equity investors are looking closely at rents, vacancies, absorption and new construction and, for the most part, like what they see enough right now to want to put more money into the sector.”

Blumberg cautionsreal estate developers and entrepreneurs that the increased flow of equity capital into the market probably won’t result in far cheaper equity costs in the near term, nor will it allow developers and entrepreneurs to get away without putting some of their own equity into their deals.

“Equity continues to be the cornerstone of the commercial real estate market, but an increased flow into the market won’t make that equity dramatically cheaper,” Blumberg said. “Our survey reveals equity investors are still seeking to invest with experienced developers and sponsors, still seeking a reasonable level of equity to be provided by those sponsors – most typically 10 percent to 14 percent of the total equity needed for the project – and still expecting reasonable returns from their investment.”

Attendees at the Urban Land Institute’s annual fall meeting agree that the real estate industry should stand strong through any coming economic downturn.

“Real estate is the best performer of the economy today ... some areas are still in a growth cycle and most sectors are solid,” said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the Haas School of Business in Berkeley, Calif. “While we hope for a soft landing for the economy, real estate will be able to sustain even a hard landing. There is no chance of repeating a downward cycle within the next two years.”

Continued strong job growth is fueling office space demand, keeping vacancy rates low and rent prices up, Rosen noted.

The retail sector remains healthy and has been largely unscathed by competition from online shopping; however, there is too much new construction in the retail industry overall, as retailers are over-expanding their space and overestimating consumer spending, he said. According to Rosen, most of the healthiest markets, in terms of economic growth, are on the two coasts, with a couple of exceptions: the top 10 cities for employment growth are Los Angeles, Dallas, Atlanta, Washington, Phoenix, San Francisco, Houston, New York, Tampa and Orlando.

Published: November 7, 2000

Use of this article without permission is a violation of federal copyright laws.