Report: real estate investors favoring apartments, hotels

Last updated on May 31st, 2022 at 04:32 am

The latest Real Estate Research Corp. (RERC) and Certified Commercial Investment Member (CCIM) Investment Trends Quarterly report offers a clue as to why so many hotel developments have been proposed in the Milwaukee area.

According to the RERC/CCIM third quarter report, luxury apartments and hotels are the leading choice for real estate investors in the United States. The apartment sector earned a 6.8 investment conditions rating, the highest among the five major property types, for the three-month period ending in June, while hotels were not far behind, garnering a 6.7 rating.

Ratings for both property types dipped slightly from the previous reporting period, a reflection of concern among investors about overpricing and capitalization rate compression within commercial real estate. Apart from these property types, real estate investors may also be interested in 2 bedroom townhomes.

Still, the high investment rating for hotels may explain why so many hotel developments have been proposed in the Milwaukee area. About a dozen hotel developments have been proposed in downtown Milwaukee, though so far, only one is under construction. A similar number of hotel projects have been proposed in the suburbs, with only a few under construction.

According to the RERC/CCIM report, investor confidence in hotel properties primarily was based on two factors: jumps in average occupancy rates and revenue per available room (RevPAR), up 1.7 percent and 7.7 percent from a year ago, respectively. The survey respondents said they found the top end of the lodging market were the most attractive investments.

“According to some sources, the greatest opportunities in the hotel sector are luxury and upscale properties,” the report stated. “This is due to minimal new supply and the significant average daily rate growth and RevPAR exhibited by these properties.”

Apartments have led all property types in terms of investment conditions since the fourth quarter of 2006.

“The demand for apartment units is likely to increase as the housing market cools and subprime mortgage defaults continue,” the report stated. “This will help to increase apartment fundamentals, thus strengthening the sector.”

The other major property types – office, retail and industrial – earned lower scores in the RERC/CCIM report when compared with the previous three-month period. The office sector received a 6.0 investment conditions rating, the lowest tracked in the second quarter, and the lowest risk versus return rating. Respondents noted  that “downtown office properties in particular are struggling, as demand has fallen drastically.” The investment conditions rating for retail and industrial properties were 6.5 and 6.4, respectively, both lower than their first quarter rating.

Still, the authors of the RERC/CCIM Investment Trends Quarterly offered optimism tempered with caution:

“Although there are signs of credit tightening, RERC expects the flow of  capital into the commercial real estate market to continue for the near-term, especially with the private equity sector continuing to make big plays within  the market,” the report stated. “However, the trend of increasing prices cannot continue. Capitalization rate compression may be well ahead of fundamentals and may have led to some overvaluing of assets in some sectors and markets.”

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