A stronger economy has commercial real estate investors feeling optimistic in 2011, according to a report from PwC.
Enthusiasm for commercial is growing as the market emerges from the bottom of the latest cycle, but in a report released Mar. 21 detailing the results of its first quarter survey of real estate investors, PwC said the industry’s rebound has been a slow one.
The report features the introduction of the PwC Real Estate Barometer, a system for analyzing historical and forecasted commercial real estate data.
With a decrease in jobless claims along with rising business and consumer confidence, the PWC Barometer supports the consensus among more than 100 surveyed investors across the country, that that real estate industry is in recovery phase.
“A big takeaway in terms of indicators is that there continues to be a trend in investor sentiment,” said Mitch Roschelle, partner and leader of PwC’s U.S. real estate advisory practice, “People saw 2011 as a year of continued recovery, there was a lot of year-end optimism, which was driving the cap rate down.”
PwC reported that the average capitalization rated decreased in 27 of the 31 markets covered in the survey, as signs of recovery become more apparent for the industry and economy. The highest quarterly decrease occurred in the regional apartment markets, where average cap rates compressed between 39 and 73 basis points the first quarter.
“Cap rates fell a lot more than last year, there’s no reversal of fortune in that instance,” said Roschelle.
The U.S. multifamily sector is at the top of the list when it comes to recovery, based on PwC’s findings. Roschelle said that most of the apartment markets throughout the country are in a recovery phase. Tighter lending restrictions will limit home-buying opportunities, causing more prospective buyers to seek multifamily housing, PwC concluded.
However, Roschelle said that the picture is not as rosy for the retail sector. PwC’s barometer indicates that inconsistent consumer spending and inflationary fears will keep the majority of the retail market in recession through 2012. As such, a recovery in the sector won’t materialize until the end of next year.
Unlike retail, the office sector is heading for a recovery by the end of 2011, according to PwC’s analysis. Roschelle said a lack of new supply and signs of decreasing vacancies in the office market are positive signs for the sector.
“While we have terrific fundamentals in the multifamily market, they will always compete with single family homes,” he said. “There is no other distribution channel for the office market, except working from home.”
As imports and exports increase, PwC’s barometer is projecting that the industrial sector will enter the expansion phase between 2012 and 2014. Meanwhile the bulk of the industrial stock is expected to begin recovering in 2011 and 2012.
However, challenges remain.
“Whenever there’s massive destruction somehow on the globe, it has an impact on the real estate market,” said Roschelle, referring to the earthquake and tsunami in Japan and ongoing conflict in the Middle East. He added that in many instances, that impact is hard to measure right away. But, despite rising oil prices and issues like upcoming debt maturities and a shaky residential housing sector, the report suggested that many investors remain focused on acquiring assets in anticipation of a continued recovery.