Deal Flow Remains Muted With Market in Flux

According to PricewaterhouseCoopers’ Korpacz Real Estate Investor Survey – Investors convey frustration at lack of quality buying opportunities for commercial real estate..Overall cap rates decreased in 17 of the survey’s 30 markets 

Commercial real estate investors reveal both frustration and disappointment at the lack of quality buying opportunities that many expected would have materialized by now, according to the second quarter 2010 findings of PricewaterhouseCoopers’ Korpacz Real Estate Investor Survey®, released today.  The report notes that the unknown speed and strength of the economic recovery has many investors anxious, with the uncertainty surrounding the large debt volume coming due in 2011 and 2012 amplifying the angst

Average overall cap rates decreasing in certain markets

In the quarterly survey, the average overall capitalization (cap) rate, a key measure of investors’ expectations of property income and value, declined in 17 of the survey’s 30 markets over the past three months, an indication that investors perceive less risk in the industry now, particularly for prime properties and better markets.  The ‘bottoming’ of the industry continues to be recognized by investors’ expectations that overall cap rates will either decline or hold steady in most markets over the next six months.  Specifically, survey participants forecast overall cap rates to hold steady in 18 of the survey’s 30 markets.  Furthermore, the survey data reveals that 13 markets could see overall cap rates decline by as much as 100 basis points in this time period.

Surveyed investors cited potential declines in near-term overall cap rates in the Manhattan office market, the national warehouse market and the national apartment market (all three segments down as much as 100 basis points).  For the individual office markets in the survey, average overall cap rates remain lower for central business district (CBD) submarkets than for suburban counterparts, suggesting that investors continue to see less risk and better investment potential in the 24-hour work-live-play aspect offered by many major CBDs.

“While most investors sense that the worst is over in terms of market deterioration, supply greatly outweighs demand across all property sectors keeping overall vacancy rates high and rental rates on a downward trend,” said Susan Smith, director, real estate advisory practice, PricewaterhouseCoopers, and editor-in-chief of the survey. “Top-tier locations are showing the most signs of life with respect to tenant interest and recovery potential.  However, inspiring leasing trends have yet to fully materialize, further contributing to this sense of market flux.”

Uptick in financing for institutional-grade assets

Surveyed investors comment that financing has become more readily available for the right borrower seeking quality assets in better markets.  The report finds that for second-tier markets and non-core assets, debt availability and buyer interest are very limited.  Until uniform patterns of stability occur, survey participants expect that the investment market will remain highly bifurcated with little attention paid to offerings with vacancy issues that do not deliver the highly sought after gains in value.

“There is a tremendous amount of capital targeting institutional-grade, quality assets.  In fact, survey participants cited that strong competition among well-capitalized buyers is helping to elevate sale prices and lower overall cap rates for many prime properties.  Furthermore, the low percentage of distressed trades as of late reflects investors’ preferences as most buyers are steering clear of “junk” and focusing only on core assets according to survey participants,” added Smith. 

Key findings and survey highlights

The report finds that despite encouraging economic data reports for retail sales and job growth, the retail sector continues to struggle and present challenges to property owners. According to the report, US retail sales growth has been propelled mostly by auto sales while temporary hires account for a large portion of the country’s recent job growth.  In the office sector, overall vacancy rates show some signs of improvement as the rate at which space is being returned to the national CBD office market has slowed dramatically over the past year.   In fact, many of the large gateway CBDs are seeing downward shifts in vacancies. Nevertheless, surveyed investors envision a slow rebound for the office sector, where a full recovery will lag behind that of the US economy.

In the industrial sector, the report notes that market conditions continue to soften, but at a slower pace than in months past.  As a result, quality warehouse assets are seeing multiple bids and strong interest from perspective buyers, which could result in a rise of offerings, according to survey participants.  The report also finds that the apartment sector is continuing to lead the recovery with investment appetite for high-quality assets in first-tier markets showing an uptick in transactions in the national apartment market.  Surveyed investors find that while rental rates have stabilized, rent declines from the previous 24 months are still working through apartment rent rolls. 

Source:  PricewaterhouseCoopers

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