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New York tops commercial property investment so far this year

With volatility returning to financial markets and uncertainty about the global economy widespread, investors are continuing their flight to quality and are looking for safe opportunities in mature, regulated markets.

The ‘Winning in Growth Cities’ report identifies the largest and fastest growing cities in terms of commercial real estate investment, the difference in pricing, as well as demand and activity within individual sectors based on estimates for the year to the end of the third quarter.

New York tops a list of US cities which have enjoyed buoyant demand this year, catching up to some extent with earlier recoveries seen in Europe and Asia. London is the second largest target, but the leader for overseas investors. Tokyo saw activity ease as the disruption of the earthquake, tsunami and nuclear disaster disrupted the market. However, unsatisfied demand is strong and the city held on to third place.
Global economic uncertainty and a tightening in policy have led to a slowing in the worldwide recovery in the past few months and have driven investors to focus harder on the prime market. With investors likely to stay risk averse, many are expected to remain focused on the top ranked cities in the year ahead and pricing for the best space is likely to increase further in all regions, with investors and occupiers facing a shortage of quality space in the best locations.
It says that the opportunities for the less risk averse will therefore be split between creating modern space in top cities or finding the next tier of cities and city locations to benefit from supply shortages in the core. ‘Indeed, the evolution of a new inter dependent hierarchy of cities will create new areas of opportunity for investors of all levels of risk tolerance,’ it adds.

The top 25 cities overall saw investment volumes rise 48% in the year to the end of quarter three, marginally ahead of the wider market which saw a 41% gain. As a result, market concentration has increased, with the top 25 commanding a 54% market share compared with 52% in 2010. The office market was the dominant sector, taking a 40% share of the total volume, followed by retail at 25% and industrial at 11%.

There was little change in the top 25 ranking with the top nine cities remaining the same as those in last year’s ranking, although they have swapped places. Some 20 of the top 25 cities are the same as last year, with five newcomers: Boston, Atlanta, San Diego, Hamburg and Melbourne.
The cities which dropped out of the top 25 are Sydney, Taipei, Kuala Lumpur, Amsterdam and Vancouver. US cities saw the best growth amongst the top 25, with several close to New York in growth terms, notably Chicago, Boston, Atlanta and LA. Elsewhere, Seoul and Melbourne also made strong gains.
In terms of the fastest-growing cities for commercial real estate investment, the continent with the most locations within the top 25 is the United States. Chicago saw the highest percentage increase in the amount of capital invested. Growth was supported by a number of large CBD office transactions, with a couple surpassing the US$600 million mark, as investors look for core opportunities in city centre locations.

Europe has the second largest number of cities in the top 25, with eight. The fastest growing city in Europe was Frankfurt with the two top deals both in Frankfurt’s CBD totalling US $1.6 billion. In Asia Pacific, Seoul was the best placed city, ranking ninth.

Although New York is the top city for real estate investment globally across all investors, London remains the top choice for overseas investors, followed by Paris and then New York. Singapore and Beijing take fourth and fifth ranking. Of the top 25 cities for overseas investors, only 12 are shared with the overall top 25 ranking, with overseas investors much more likely to favour Asian or European cities rather than American ones. New York is the only US city in the top 25 cities for overseas investors.

London is the top city for office property investment globally, despite a marginal fall of 1.9% last year. New York retained its second place but has significantly closed the gap following an increase of 189% to US $14.1 billion. As recovery re emerges, more investors will seek out growth not just security, as evidenced by the steady rise of Asia as a target. Five years ago, three of the world’s top 20 markets were in Asia. This year, it rose to eight, compared with five in Europe and seven in North America.
Hong Kong attracted the most investment in the retail sector, boosted by the US $2.4 billion sale of Festival Walk. The Rhine-Ruhr metropolitan area in Germany and New York follow in second and third position, with Manchester and London in fourth and fifth. Shopping centres were the best performing sub sector with investors eyeing asset management angles. Economic fundamentals in Asia Pacific and South America are expected to remain good. Coupled with the limited availability of quality retail space in many cities and strong demand at the luxury end of the market, this is likely to support further growth.

The report says that economic and real estate trends will remain uncertain for some time and vary enormously market by market. While the medium term story is still all about the growth of emerging markets, in the short term, a lack of growth drivers globally means investors are likely to remain keener to find stability and income than rather to pursue growth.

‘As a relatively high yielding asset, real estate will remain in demand and the pressure will be there for investment volumes to grow, if the supply and finance exist. In the main, banks appear likely to aid with the supply side of this equation, albeit the amount of prime property they control is often limited,’ the report says.

‘However, this applies less on the demand side. Finance availability has improved for lending on quality assets but is still somewhat restricted and indeed uncertain, as banks await new rules and regulations in Europe or America amongst other locations, and as government policy on lending is tightened in China,’ it adds.