(Bloomberg News) When Sumeet Parekh bought a retail property in Manhattan's TriBeCa neighborhood in January, individual investors provided about a quarter of the financing.
Morgan Stanley put up a little more than half of the $6 million purchase price, and Parekh contributed about $1.25 million. He got the rest from wealthy investors, who contributed increments of $100,000 to $625,000 in hopes of a 10% annual return and a portion of the building's appreciation, said Parekh, a principal at San Diego-based HP Investors, which owns and invests in commercial properties.
High-net-worth individuals invested $2.1 billion in commercial real estate last year, up from $579 million in 2009, according to Real Capital Analytics Inc., a New York-based research firm. Apartments were the properties most sought after by investors last year, accounting for 32% of deals they were involved in, according to Real Capital, which has tracked more than $5 trillion in global sales transactions since 2001.
"Commercial property looks damn attractive versus other asset classes right now," said Dan Fasulo, managing director at Real Capital. "Everyone's looking for some form of inflation protection. They're buying gold, they're buying oil, or you can buy property. It has inflation protection characteristics, plus it gives you a check every month."
Prices for commercial property have dropped 42% since their peak in October 2007 through December, according to the Moody's/REAL Commercial Property Price Index. The index posted gains in three of the last four months of 2010 as individual and institutional investors including the Hartford Financial Services Group Inc. bet on a rebound.
Apartment Demand
Demand for apartment buildings has risen as the foreclosure crisis forces more people to rent and the children of baby- boomers move from college dorm rooms to their first residences. Rents climbed 4.3% in the last three months of 2010, the most since the third quarter of 2006, according to Dallas research firm Axiometrics Inc., while U.S. homeownership rates in December remained at a 10-year low, according to data compiled by Bloomberg. Axiometrics projects a 6% increase in U.S. rental revenue by the end of 2011 from December 2010.
"There's a lot more equity that wants to get in the real estate market, particularly from high-net-worth individuals," who want the higher returns without the onus of managing a property, said Robert Knakal, chairman of the New York-based commercial property brokerage Massey Knakal Realty Services. "They don't want to get a call at four in the morning that something is broken, or there's a fire or the toilet is stuffed up," Knakal said.
Low CD Yield
Low yields on other investments are driving investors to real estate, said Knakal. "Look at what your options are: Are you going to buy a CD and get 50 basis points on your money? Or buy a 10-year Treasury and get 3.46%?" he said.