Real Estate Investors Remain Cautiously Optimistic

Wed, 2011-06-22

NEW YORK, NY - Despite a skittish U.S. economy, most commercial real estate investors remain upbeat and cautiously optimistic about the industry's future, with very few being dissuaded from eagerly acquiring assets and seeking opportunities across all commercial real estate sectors. In fact, many investors are aggressively pursuing deals as they continue to see signs that the industry's overall fundamentals are stabilizing and even improving in certain sectors and regions, according to the second quarter 2011 findings of the PwC Real Estate Investor Survey, released today.

According to the report, rental rates remain below peak levels for most property types and regions, although there is a sense among surveyed investors that they have stabilized. This quarter, the average market rent change rate assumption reported by Survey investors increased in 25 of the report's 31 markets, further demonstrating investors' sense that an ongoing, albeit slow, recovery is occurring.

"The trajectory of the commercial real estate industry's recovery is largely dependent on the health of the U.S. economy. The ability of the economy to add jobs instills optimism in both businesses and consumers," said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. "Despite recent disappointing labor reports and falling home prices, commercial real estate investors continue to look to the positive aspects of the industry as they remain cautiously optimistic that the recovery path will continue. The significant lack of new supply over the past several years serves as the catalyst of the ongoing recovery. As tenant demand continues to grow, positive absorption has begun to drive rents up. The prospects of rent growth have driven much of the aggressive bidding by investors in certain top-performing markets."

"In addition to improving fundamentals, the volatility of the stock market, weakening currencies, and the low fixed income coupons have fueled a rotation into hard assets such as precious metals, commodities and commercial real estate," Roschelle added. Most institutional investors, particularly pension funds, are targeting top-performing assets in strong markets with some surveyed participants indicating that they're concentrating on opportunistic plays. Moreover, there are a growing number of distressed assets that are trading as bank regulators put more pressure on lenders to deal with nonperforming loans – yet another sign that the U.S. commercial real estate industry is on the mend.

While the apartment sector has led the industry's recovery and has experienced continued cap rate compression over the past 18 months, the office sector was slow to rebound due to a sluggish labor market. However, as employment has improved and business profits have risen, the sector has gained traction and, as a result, more investors are focused on acquiring office buildings, causing overall cap rates to decline – especially for core assets in top markets. Over the next six months, the Survey found that participants expect overall cap rates to either hold steady or decline due to strong buyer interest, low interest rates, and a positive economic outlook.

Market Rent Growth Expectations: Second Quarter 1996 thru Second Quarter 2011

"Surveyed investors are treading carefully as they realize that troubles could arise if interest rates rapidly increase at the same time and a large pool of commercial maturities peaks over the next two years," stated Susan Smith, editor-in-chief of PwC's quarterly survey. "If those factors play out, overall cap rates would likely rise and negatively impact property values. Luckily, though, most of the participants have told us that they maintain an optimistic outlook for now, even if cautiously so."

Anticipated Performance for Each Sector

The barometer shows that the best-performing sector in the industry is the U.S. multifamily market, which is dominated by the recovery phase of the real estate cycle and is segueing more and more into the expansion phase annually through 2014. In fact, not one of the 81 multifamily metro areas included in the barometer will be in recession over the next four years.

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