Real estate still darling of deep-pocketed investors.

A flood of investor capital, attractive interest rates and improving fundamentals will lead to a healthy commercial real estate investment market in 2006.

Rising interest rates over the last 12 months have not had a significant impact on the pricing in the investment market for real estate, and current trends indicate that significant increases in rates are unlikely, suggesting that there will continue to be little impact in 2006. The impact we did see last year was relatively limited to private investors, and there was no deleterious effect on pricing.

More importantly, the current rate environment will continue to encourage sellers to bring product to the market, which will further fuel investment sales. About $250 billion in sales are anticipated in 2005, compared to $170 billion in 2004 and $110 billion in 2003, proving there is no lack of product by historical standards.

As important as low interest rates are to the investment market, it is the enormous liquidity in the market that drives pricing, transactional volume and transactional speed. This excess will continue in 2006. Institutions have already made decisions about how much capital they will allocate to real estate this year, and most will have a significant amount. These decisions are made in advance, so even if the market changes, the capital is already committed.

Finally, on a relative basis, real estate is an attractive investment alternative to stocks and fixed income. The U.S. stock market was flat in 2005, and fixed income is at historically low rates. In this context, real estate--with its current returns and prospects for appreciation in value--is a compelling alternative.

Office investment

Increased job growth has led to a decline in office vacancies, as weil as a rise in rental rates. This was the single piece that had been missing from the market for healthy fundamentals in the past. The typical characterization of the investment market in 2003 and 2004 was that there was a disconnect between fundamentals and value. In 2006 we will see a stabilization of these fundamentals, and as a result, the run up in interest rates will be offset by the compelling solidity of market fundamentals. Pricing will stay firm, especially for class-A properties. Also, it's important to note there has been very little speculative construction, so new supply won't undermine market fundamentals as it has so viciously in the past.

Cap rates should be in the five percent to seven percent range for CBD office space, with slightly higher range for suburban properties.

Foreign investors are still active. While low cap rates have discouraged German investors who value current yield over long-term appreciation, investors from Ireland, Australia, Israel and the Middle East have become active in U.S. properties over the last 18 months, and we anticipate that activity continuing.

Institutional investors are emerging as the leading buyers of CBD and suburban office properties. They accounted for more than $17 billion of office investment in 2005. Allocations are such that some advisors aren't accepting new contributions until 2007, which has never happened before, as massive amounts of capital pursue real estate.

Multi-family investment

Multi-family investment sales for 2006 continue to look promising. We are entering the year with a tremendous pipeline that continues to be backfilled as we sell other assets. With expectations that the interest rate environment will remain relatively steady at what we consider near historic lows, the apartment and multi-family asset class will remain extremely sought after in 2006.

Hotel investment

Hotel investment will also remain strong in 2006, as it has been for the past two years, as long-time hotel investors find new competitors from cash-rich organizations with new-found interest in hotels. Cap rates will continue to be at all-time lows, with deals continuing to be completed below eight percent. In general, there is more capital chasing hotels than there are hotel properties for sale, creating an imbalance between investor demand and product availability.

Retail Investment

Investment sales will continue to be very robust for retail investment in 2006. The demand for retail properties is outpacing the supply by a long stretch in all of the major markets.

With consolidation taking place among grocery shopping center owners we will see fewer sales, and the properties that do hit the market will go into the hands of the public owners--the REITS and the institutions--which will continue to push pricing up. Mall sales will be limited, with lifestyle and open-air centers leading the retail charge.

Cushman & Wakefield sees the relatively low interest rate environment, the availability of capital from both institutions and foreign investors, and improved real estate leasing fundamentals lead by job growth spurring the investment sales market in 2006.

National markets for all property types are relatively strong, and we expect those trends to continue over the next 12 months.

TIMOTHY WELCH, EXECUTIVE MANAGING DIRECTOR FINANCIAL SERVICES CUSHMAN & WAKEFIELD