Commercial Deal Flow Remains Muted, with Market in Flux: Surve

07/02/2010 By: Carrie Bay Printer Friendly View

Commercial real estate investors have become both “frustrated and disappointed” at the lack of quality buying

opportunities that many expected would have materialized by this point in the downturn, according to the second quarter findings of the PricewaterhouseCoopers’ Korpacz Real Estate Investor Survey.

The report also notes that the unknown speed and strength of the economic recovery has many investors anxious, particularly with the large volume of commercial mortgage debt coming due in 2011 and 2012.

In the quarterly survey, the average overall capitalization 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. PricewaterhouseCoopers says the drop is an indication that investors perceive less risk in the industry now, particularly for prime properties and better markets.

“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 of the real estate advisory practice at PricewaterhouseCoopers and editor-in-chief of the survey.

Smith continued, “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.”

Surveyed investors comment that financing has become more readily available for the right borrower seeking quality assets in better markets. However, the report finds that for second-tier markets and non-core assets, debt availability and buyer interest are very limited. Until further stability takes hold in the commercial real estate sector, the investment market is likely to remain split along these lines.

“There is a tremendous amount of capital targeting institutional-grade, quality assets,” Smith noted. “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.”

Smith also pointed out that distressed trades have been nominal lately, which means most investors are steering clear of “junk” and focusing only on core assets.

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.

In the office sector, overall vacancy rates are beginning to show some signs of improvement. Nevertheless, surveyed investors envision a slow rebound for the office sector, where a full recovery will lag behind that of the U.S. 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.

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 leading to an uptick in transactions nationally. However, surveyed investors said that while rental rates have stabilized, rent declines from the previous 24 months are still working through apartment rent rolls.

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