NEW YORK, Sept. 18, 2008 (GLOBE NEWSWIRE) -- Buyers and sellers of commercial real estate remain on the sidelines, putting commercial real estate investments on hold in the short term despite an optimistic long-term investment outlook, according to the third quarter 2008 PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r), released today.
In the year since the onset of the national credit crunch, the availability of debt for real estate has practically vanished, fundamentals have weakened in all property sectors and the economy has shown few signs of rebounding, according to the PricewaterhouseCoopers report. However, commercial real estate investors view industry fundamentals as stronger than in previous downturns, which bodes well for a healthy recovery once the current correction ends.
Stricter lending practices, lingering doubts about the economy in the wake of rising joblessness, the Wall Street crisis and the uncertainty of near-term tenant demand and space needs are all making investors more nervous about new investments and, in turn, limiting acquisition activity.
According to the report:
-- The lack of available debt for commercial real estate and
disheartening economic news is causing buyers to be less
aggressive in their underwriting, which is keeping the bid-ask
pricing gap from closing. Even well-leased assets in strong
locations are finding fewer bidders.
-- Across each property sector, leasing activity is down compared
to prior years and overall capitalization rates are up.
-- Lenders are no longer advancing capital for empty space and
equity buyers are questioning property performance. Thus,
value-add properties remain highly sought-after even though they
are the most difficult to sell.
-- While there is little, if any, widespread evidence of distressed
sales involving assets with non-performing loans and/or
discouraged owners, investors anticipate an increase in distressed
sales in the coming months. This could provide capital-laden
investors with buying opportunities.
There is consensus among investors that sales activity will not pick up until the market sees stronger evidence of a genuine and sustained economic recovery and the debt markets show signs of stability. For now, owners are hoping to hold on to their properties and ride out the correction.
"Few investors expect problems in the financial markets to ease any time soon and even fewer expect debt availability and lending practices to return to where they were prior to the credit crunch," said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers. "Uncertainty has stalled investments and dramatically reduced sales and leasing activity. However, market fundamentals continue to be sound, and the investor pool is now composed largely of more established players who can weather the storm. While the outlook remains choppy in the near term, commercial real estate remains a viable long-term investment."
According to the report, the average overall capitalization (cap) rate showed a year-over-year uptick in an increasing number of markets; typically, higher cap rates mean lower values. Over the next six months, survey participants expect overall cap rates to increase in each surveyed market. Nationally, the cap rate increase is forecast to average 34 basis points. With an average of 79.2 basis points, the Houston office market is forecast to see the largest cap rate increase over the next six months.
"Higher cap rates and more conservative underwriting on the part of investors and lenders are having a huge impact on what sellers are able to successfully market," said Susan M. Smith, editor-in-chief of PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) and a director in the PricewaterhouseCoopers real estate sector services group. "Buyers are having a hard time obtaining favorable financing, so properties with assumable debt are receiving a lot of attention from buyers."
Among the significant developments in select sectors during the past quarter:
-- Regional malls weaken - Reduced consumer spending and high gas
prices continue to weaken the performance of the national
regional mall market, with wholesale and discount retail chains
reaping most of the benefit of tax rebate spending. For the most
part, Class-A regional malls are expected to outperform lesser-
quality regional malls and garner lower overall cap rates in the
months ahead.
-- Power centers fail to pick up the slack - Even though big-box
and discount retailers continue to outperform traditional
retailers in terms of same-store retail sales growth, investors
remain cautious about all types of retail assets, including power
centers, which are open centers dominated by big-box and discount
retailers. The best markets for such centers include the top
coastal markets, as well as areas experiencing significant
population growth, such as Austin, Charlotte and Dallas.
-- Few buyers for strip shopping centers - A wide bid-ask pricing
gap and weak retail fundamentals are slowing strip shopping
center sales. Grocery-anchored shopping centers located in either
infill locations with high barriers to entry or markets with
strong population growth remain a preferred asset type for many
investors.
-- CBD office market holding up overall - The national CBD office
market continues to feel the impact of the slowing economy, with
leasing activity declining and overall vacancies increasing.
However, the downward shift in tenant demand has yet to cause
significant distress in most markets: While Orange County (CA)
and Fort Lauderdale posted year-over-year increases in vacancy
rates, Boston, Los Angeles and Baltimore reported year-over-year
declines in overall vacancy.
-- Suburban office vacancies rising - The national suburban office
market continues to exhibit weakness as a result of a decline in
tenant demand for both new and expansion space, with vacancy rates
rising in many markets. Orlando and California's Inland Empire and
Orange County all reported large vacancy increases over the past
year; suburban Hartford, Seattle and Philadelphia all saw
declining vacancy rates during the past year.
-- Apartment market increasingly localized - The concept of a
national apartment market is becoming almost an oxymoron, as the
performance of this sector can be broken down on not only a
market-by-market basis, but also a neighborhood-by-neighborhood
basis. In areas with greater exposure to the residential subprime
crisis, where prices have not yet bottomed out, the apartment
sector has benefited from renters who are staying put.
About the PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r)
PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r), now in its 21st year of publication, is one of the industry's longest continuously produced quarterly surveys. The current report provides detailed overviews of 29 separate markets, including the national retail markets (regional mall, power center and strip shopping centers); overviews of 18 major office markets, including the recently added markets of Charlotte, Denver, Phoenix and San Diego; and national overviews of the CBD and Suburban Office, Flex/R&D, Warehouse, Apartment, Net Lease and National Lodging Markets. The report also features up-to-date commentaries concerning Valuation Issues, Technology News and Trends and Economic News.
Information about subscribing to PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) can be found at www.pwcreval.com. Members of the media can obtain an electronic copy of the full report by contacting Steve Maguire at (781) 878-8882 or smaguire@hubbellgroup.com.
About PricewaterhouseCoopers Real Estate Services Group
PricewaterhouseCoopers real estate services group is part of the U.S. firm's financial services practice, one of the leading providers of integrated professional services to major financial services organizations. Its integrated approach to problem-solving involves an international network of real estate accounting, tax and business advisory professionals who can quickly mobilize to form highly qualified teams to respond to a client's opportunity or challenge. Its global real estate professionals offer in-depth experience in a wide range of financial accounting and reporting issues; global tax solutions; investment fund structuring; capital market transactions; securitization issues; technological applications; systems and operations; due diligence and transaction support; and valuation management.
About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.