Despite the considerable amount of private equity capital held by opportunity funds, institutional investors, foreign entities, real estate investment trusts, and high-net-worth investors, all parties appear to be sticking with core assets instead of broadening their investment horizons. 

Panelists addressed private equity capital concerns at a recent Urban Land Institute capital markets conference in New York City. Speaking to a crowd of nearly 300 at the New York Sheraton Hotel & Towers, the panel’s presenters looked to answer questions about investment activity in 2011. 

Steve Furnary, chairman and CEO of ING Clarion Partners, advised developers not to seek getting financed in markets where “rents have not gone up enough to really rationalize new development.” 

Echoing Furnary, American Realty Capital chairman and CEO Nicholas Schorsch said that while water is coming in for investors, they “really do not want to take risks unless it is with assets in which they can really see income.”

When asked where growth is expected, panelists seemed to agree that secondary and tertiary markets will experience a larger share of overall funds in 2011.

“There are still major flows of capital going into D.C., New York, and San Francisco,” said Jay Koster, capital markets group president for Jones Lang LaSalle. “There seems to be a continuous flow of money [and] we are starting to see some going into other markets like Dallas and Atlanta.”

“There is a lot of real estate in the center of the country,” added Furnary. “When the spread is wide enough, investors will start investing in the center of the country. There is definitely growth in these markets.”

In discussing areas that developers and investors should avoid, panelists warned the audience to be careful about retail property; however, medical space is expected to be strong over the next five to seven years since its growth will be unaffected by any Democratic- or Republican-led changes in health care policy. Koster and Frank Cohen, senior managing director at Blackstone Real Estate Advisors, advised attendees to invest in only those secondary and tertiary markets in which immediate growth is expected.

When asked what they have learned from previous down cycles and what they expect for the overall outlook, the consensus was that capital is flowing back into the markets. However, the panelists agreed that employment numbers are still at least six months away from what is good for the real estate market. They suggested that investors look for assets that they plan to hold for a minimum of three to five years. 

“It looks like this is going to be a slow five-year recovery, like from 1990 to 1995,” said Furnary.  “Capital markets are coming back and they are continuing to improve. We have a gradually improving economy and this is going to be a good, strong recovery.”