One thing I particularly enjoy about the dinner events that Grubb & Ellis hosts for its institutional investment clients (besides the tasty vittles) is the opportunity to query our guests on the issues relevant to commercial real estate. I get to do this because I moderate a short pre-dessert discussion during which I invite our clients to weigh in on the issues of the day, after which I provide the Cliff Notes version of my forecast for 2011. At our dinners last week in Boston and New York, here are three key points made by senior executives at major institutional investment companies:
- Interest rates will remain low, though not as low as they are now and not as low as many analysts expect. The yield on the 10-year Treasury, 2.80 percent on Monday, will rise to the range of 3 to 3.25 percent by mid-2011 versus a sub-3 forecast by Wells Fargo, PNC and Goldman Sachs among others.
- Asked whether the main driver of property prices next year will be improving market fundamentals (vacancies, absorption, rents) or continued cap rate compression, the majority of our guests said continued cap rate compression, suggesting little faith that a leasing market recovery is imminent. This would seem to suggest a disappointing year for opportunistic investors because it’s tough to reposition properties when tenant demand is weak and Class A landlords are draining tenants from properties that would quality as opportunistic, i.e. Class B.
- Will institutional investors broaden their targets next year beyond the core assets driving demand in 2010? Not if our guests are a representative sample, which I believe they are. Nearly all stated that they had no plans to move beyond their current targets.
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