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What’s hot in the real estate market

Real estate values are finally, solidly on the rise. Both residential and commercial properties are seeing strong gains and potentially long-term yields. For investors large or small to cash in, the most important factors to consider are location, sector and demand.

In the residential market, home values have come off the bottom of the housing crash, but they are still well below the highs of the recent housing boom. Single-family home prices were up 11.8 percent in November, according to CoreLogic, the most recent reading available. 2013 was in fact the best year for home price appreciation since 2005, but price gains are varying dramatically from market to market.

The biggest gains are in markets that investors entered early, buying up distressed properties, rehabbing them and putting them up for rent. For instance, in Nevada, where housing crashed hardest in 2008, prices are up more than 25 percent from a year ago, while they are only up 3.5 percent in Pennsylvania, which saw less of a housing decline.

New homes for sale at a housing development in Dublin, Calif., in December 2013Getty Images

The investor trade in distressed homes is certainly not over; it has just migrated east, where there are more foreclosed properties due to delays in the judicial process. Atlanta, Chicago and Charlotte are seeing strong investor demand, but price gains are still relatively small compared to the so-called "sand states," where investors have now priced themselves out of the market.

For those looking to get in now, some large-scale institutional investors in the West are already starting to sell some of their properties. What is most interesting is that some are also offering financing to smaller investors. Blackstone recently announced it would lend to investors looking to borrow a minimum of $500,000 to buy at least five properties. The big banks, Fannie Mae and Freddie Mac have put strict limits on investor financing.

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"The market for financing small- to medium-sized borrowers in the single-family rental space is underserved," said Blackstone's John Beacham in an interview. "They are local entrepreneurs, small-business owners, real estate agents, contractors and CPAs."

As more large-scale investors start to lend and then sell some of their own properties, we may see companies like Blackstone actually financing the sales of their own homes to other, smaller investors.

Another play in the single-family rental trade is investing in securities backed by these rental homes. Several large-scale investors are beginning to offer bonds that pay off through not just rental stream but home price appreciation. While some consider this a risky product, as home prices rise and rental demand continues unabated, the risk appears small.

For those leery of this still-emerging asset class, and single-family rentals in general, multifamily apartment housing is another strong option. Vacancy rates for these buildings are now a full 390 basis points below their peak of 8 percent at the end of 2009, according to Reis. Rent growth is slowing slightly but still up. The only downside is that a lot more apartment supply is now coming online.

"New construction's Pandora's Box has most definitely opened," said Reis senior economist Ryan Severino. There were 41,683 units completed in the last quarter of 2013, the highest since the end of 2003. Demand, however, is still quite strong.

"Four years after the advent of a recovery in the apartment market, newly completed units continue to be absorbed," added Severino.

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The best way to invest in multifamily apartments is through Real Estate Investment Trusts. While REITs have suffered lately in a rising interest rate environment, they can still be a good play.

The office and retail sectors are not nearly as strong as apartments. Office has been struggling, as the economy is not adding enough white-collar jobs to fill the office space. Office REITs invested in top markets—like New York, Washington, DC, and San Francisco—are doing well, but the gains drop off quickly as you move to the B locations.

Arguably the best bet in commercial real estate today is in the very unglamorous warehouse sector. As more shopping moves online, retailers need distribution facilities near urban centers, and that means more demand for warehouses.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

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