Real estate investment market going well

August 2, 2011
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The real estate investment market remained strong through the first half of this year, continuing a trend that began a year ago, and for three reasons. First, lenders are continuing to lend. Second, prices are still relatively low. Third, people seem to feel more confident about the economy.

The combination of those three has grabbed the attention of local investors, who have been able to score some bargains.

“Probably the single biggest reason is an increasing availability of financing. Financing still drives the real estate market, and in 2009, there wasn’t much money to be had. On top of all the uncertainties of that market, a lack of available financing just made it very difficult for an investor to go out there and find opportunities,” said Colin Kraay, a principal with Grand Rapids-based Colliers International of West Michigan and an investment specialist.

“So we’re seeing rising confidence in the overall recovery. We’re seeing people who are trying to take advantage of the pricing of properties, although prices are certainly off their lowest lows. Prices have actually increased, and some property types have actually seen some pretty good increases. But they’re still typically well below where they were in the peak of the marketplace,” he added.

“Interest rates remain low, financing is increasingly available, rising confidence in the market has come back around — all those things kind of combine to make it very much a buyers’ market out there,” he said.

Kraay said lending started to pick up in the second half of last year, after banks took care of internal issues that emerged when the nation’s financial market took a very deep tumble following the housing mortgage crisis. He noted that lending activity still hasn’t returned to the level it was prior to the crisis, but activity improved significantly since mid-2009.

When the Business Journal went to press last week, Congress still was stalemated on how to raise the debt ceiling by Aug. 2, the day the U.S. could very well default on its obligations. If the ceiling isn’t lifted in time, Standard & Poors and Moody’s Investors Service could drop the country’s bond rating a notch, which would push interest rates up. Such a move would affect the investment market.

“Long-term financing is tied to the Treasury bond. If they fail to raise the debt ceiling, certainly the Treasury bonds are going up because the return investors are going to want for their risk is going to go up, therefore it’s going to have a trickle-down effect on what we do. Whether that will happen immediately or not, nobody really knows. But I think the general perception is, rates will go up if we fail to raise the debt ceiling,” he said.

Kraay said multi-unit housing has drawn more investment dollars than any other real estate sector this year. A recent sales example is the Northridge & Sutters Mill Townhomes in Allendale near Grand Valley State University. The complex has 22 rental units and it sold recently for $2.35 million. Kraay wasn’t surprised that multi-unit housing was leading the commercial investment pack. He said it was like that across the country and traditionally has been a leading sector for investors.

“From an overall risk standpoint, multi-housing always has been the lowest risk. It’s easier to find one apartment dweller than it is to find one business that fits a unique space. It’s always been a less risky asset type,” he said.

“If you look at the dynamics of the marketplace, financing is tougher to come by in the housing market. The mindset is changing, particularly in young people a little bit, as it relates to going out and buying a house or renting. The primary factor is, it’s tougher to get a residential mortgage as it requires more of a down payment, there is uncertainty in that market, and it’s driving people to rent, which is having a positive influence on occupancy. It’s also having a positive influence on lease rates, and investors see those things.”

A development on Pere Marquette Lake with 31 condos, 32 boat slips, a clubhouse, swimming pool and enough land for another 80 condos recently sold for $1.4 million.

Another recent sale is an example of a different kind. Investors bought a hotel for $3.1 million from a bank that repossessed it when the owners couldn’t keep up with the loan payments as the hospitality business dried up during the Great Recession. The bank wanted to move the property but had a limited amount of time to do so. So the lender was willing to deal on the hotel if it could be sold promptly, and it was. Kraay said his team put together a group of investors that could write a check fairly quickly, and the transaction closed within 14 days.

“Those are the types of opportunities that we’re finding in this marketplace. Cash buyers certainly have a leg up on the competition. An ability to close quickly before the end of a quarter or before a shareholder meeting, in some cases, is important for banks. They certainly have FDIC regulations that they deal with that prohibit them from writing things down too quickly or limit their flexibility. But there are time periods when all of a sudden, the stars kind of align and, as an investor, you can meet that need for a quick close,” said Kraay.

At the same time, Kraay noted that hotel rooms are still attractively priced and room occupancy is rising nationally. With investors and lenders feeling more confident about the economy, hotels are being seen as good investments right now, especially if the price is right.

“They’re still priced attractively to what they could potentially bring in from an income standpoint. So investors are flocking to that asset type,” he said.

Kraay and Colliers International see the investment trend continuing for the rest of the year, so much so that the firm added Shayne Malone to its investment team. Malone has 10 years of experience in the field and will concentrate on multi-unit housing.

“We’ve actually got a pretty full pipeline of projects that we’re working on. So I think the end of the year is going to continue to trend. Interest rates are likely going to remain attractive through the rest of the year,” said Kraay, if the debt ceiling is raised.

“There is no doubt that there is capital available for investment real estate, which is very different than what we would have said 18 or 24 months ago when nobody wanted to finance investment real estate. There is capital available today, so I think the trends that we’ve seen from the second quarter of last year are going to continue through this year. It’s going to continue to be a buyers’ market, an opportunistic market.”

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