How We Learned to Love the Core Real Estate Asset Pricing Bubble

[William Byers]

http://m.nreionline.com/finance-investment/how-we-learned-love-core-real-estate-asset-pricing-bubble

Direct Excerpts from the article:

1. 1. There is significant alpha for those willing and able to undertake value-add and development strategies in the top performing markets. We have been in an environment of very low supply for the last six years. Nationwide, new commercial real estate construction is at a fraction of normal levels. At the same time, demand has been steadily increasing and existing buildings are continuing to age and become functionally obsolete.
2. 2. There is also ongoing opportunity to invest in high-performing secondary and tertiary markets (Austin, Texas; Denver, Colo.; and Nashville, Tenn., for instance). The recovery has been different this time in that it has not involved just the coastal or      “smile-on-the-map” markets. It has been, and continues to be, a much more      geographically broad-based recovery, thanks to a broader array of economic      drivers, including energy, agriculture, medical services, manufacturing, trade, transport and high technology—all of which have been more widely spread around the country. For example, much of the energy boom has occurred in the heartland, bolstering former fly-over locations, long  overlooked by investors.
3. 3. Part of the opportunity in secondary and tertiary markets is that they have suffered—or benefited—from institutional neglect. They are too small and unknown to be on the radar screen of large institutional investors such as pension funds, sovereign wealth funds and the like, who often prefer “presence” in certain markets, regardless of the risk, simply to elevate their profiles. But the paucity or lack of information about these markets, if one is an efficient market theorist, actually means that there are potentially greater returns to be realized—precisely because of their apparent inefficiency.
4. 4. The good and improving health of corporate America has meant that many larger corporate tenants have stronger balance sheets than ever and after years of belt-tightening, are financially strong and expanding. Demand will rise and it will rise not      just in gateway markets, but will likely trickle out to some of the more under-served secondary and tertiary markets across the country. Returns for savvy investors who play well could be formidable.