April 26, 2017

Across the U.S. markets, value-add opportunities are garnering more attention from a broader set of investors than core investments.

As the volatility of the final quarter of 2016 made way for a more stable start to 2017, a couple of things became clearer: the cycle is holding strong, and capital in U.S. commercial real estate is becoming more selective.  While JLL’s Global Capital Flows notes year-over-year volume in the United States dropped 12 percent overall, investors are still finding opportunity when the time is right.

“In a market where rental growth is moderating in select sectors and markets, investors are being patient, disciplined and selective in analyzing opportunities. This is creating an increasingly divergent liquidity story throughout today’s real estate capital markets,” said Sean Coghlan, Director of Investor Research at JLL. But, according to Coghlan, that’s where some opportunities arise.

In early 2017,  JLL’s Capital Markets team brokered the sale and financing of an office building at 123 N. Wacker Drive. The bidding process was hotly contested as investors sought to get their hands on a value-add play in the heart of the city’s business district. In the end, the building sold for US$146.5 million – exceptional for an asset that was 58 percent leased – based on the strong location and the added draw of being one of the few assets in the city offering large contiguous blocks of space available for lease.

“The buildings that have what capital is looking for – whether that is risk profile, location, amenities, tenancy profile, size or a combination of those– have an opportunity to push pricing. There is strong demand for the right transaction,” says Coghlan. “But buildings outside of that will see a discrepancy in pricing.”

This is most notably happening in the retail and office sectors, where some pricing gaps have emerged.

“The yield gap is most evident in retail assets,” adds Coghlan. “Urbanization, demographics and ecommerce are all driving this shift.”

More than one million people move into cities each week, according to global demographic estimates. This population shift is pushing renters, retailers and companies to urban cores with retail centers located in city centers also experiencing a boost as more local residents translate to more foot traffic.

“Urbanization is driving swarms of people downtown. As companies strive to attract top talent, they’re seeking office space in not only the traditionally defined central business districts, but as an extension of previously ‘fringe’ but now in-vogue districts like Chicago’s Fulton Market,” said Nooshin Felsenthal, Managing Director for JLL’s Capital Markets. “Investors expect these occupancy trends to continue, and that will drive increasing values in prime urban assets and contribute to some increase in the yield gap between ‘have’ and ‘have-not’ market segments.”

Foreign investment in us real estate also has a small part to play in the yield gap, tending to focus on specific sectors and segments of the market. Due to perceived risk and familiarity, offshore investors are more willing to invest in assets located in primary markets, and are still much more likely to aggressively seek urban Class A office, trophy hotels and flagship retail products.

Looking ahead, Coghlan believes that the gap is continuing to grow.

“Capital is still disproportionally favoring certain parts of the market, which will increasingly influence pricing trends and the macroeconomic environment will play a huge part in this over the course of the year,” he says. “ Should employment and wage growth strengthen and expand more than anticipated across the United States, the pricing gap may reverse somewhat and narrow again.  But, if growth underperforms expectations, we may see a widening of primary-to-secondary market spreads.”

“We are starting to see capital diversify a bit in terms of the locations investors are interested in, which should help offset the imbalance over the next few years.”


Sean Coghlan

Head of Global Capital Markets Research, JLL

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