PricewaterhouseCoopers Korpacz Real Estate Investor Survey sees fluctuation in commercial marketsMortgagePress.comPricewaterhouseCoopers Korpacz Real Estate Investor Survey, commercial real estate
The U.S. commercial real estate market's downturn continued in
the second quarter of 2008, hurt by a weak economy, the credit
disruption, tepid tenant demand and a wide pricing gap, according
to the latest edition of the PricewaterhouseCoopers
Korpacz Real Estate Investor Survey.
A plunge of as much as 81 percent in the sales of some types of
commercial property, an increase in average overall capitalization
rates for many markets, a slip in the rental market and a decrease
in initial-year market rent change rates accounted for much of the
downturn during the quarter, according to the quarterly survey of
major institutional equity real estate investors. Investors'
uncertainty about the direction of the economy added to the woes.
With job losses mounting and consumer confidence waning,
prospective buyers were unwilling to meet sellers' pricing levels,
widening the pricing gap. Many investors believe that the disparity
in prices is unlikely to narrow again until there are stronger
signs of economic prosperity and liquidity returns to the
"The pricing gap that resulted after the credit markets
tightened has been further widened as a result of most real estate
investors now taking a back-to-basics approach and being more
conservative than sellers in their underwriting," said Tim Conlon,
partner and U.S. real estate sector leader for
PricewaterhouseCoopers. "Investment opportunities still exist, and
there are still buyers out there willing to take advantage of good
While the majority of nationwide markets are mired in an
economic slowdown, investors realize that the commercial real
estate fundamentals are healthier than they were during the last
downturn in the mid-1990s. New construction is being restrained,
supply and demand is more balanced and cash flow assumptions are
more realistic, laying the groundwork for a rebound when the
economy gathers steam. For the time being, the "fundamental"
investor has replaced the leveraged investor.
"On the buy side, real estate investors are no longer betting
that properties will experience tremendous increases in rental
income and value and that is why the pricing gap between buyers and
sellers took center stage in the past quarter," said Susan M.
Smith, editor-in-chief of PricewaterhouseCoopers Korpacz Real
Estate Investor Survey and a manager in the PricewaterhouseCoopers
real estate sector services group. "We are definitely in a
downturn, but investors are finding comfort from the notion that
the fundamentals are still quite healthy, positioning the industry
for recovery once the economy begins to turn around."
Property types and locations are displaying different trends,
the survey showed. Strong investment interest is buoying prices of
high-quality assets in top-performing markets despite a drop in
transactions, reflecting a "flight to quality." In secondary and
tertiary markets, price declines and cap rate expansions are most
A large pricing gap and lack of leverage led to a massive
decline in sales volume in the four major commercial property
sectors on a year-over-year basis during the second quarter of
2008. Transactions involving significant office, apartment and
retail properties plunged by at least 79 percent in April compared
with a year earlier, while industrial sales fell the least, by 67
percent. As the industry continues to transition, it is
increasingly favoring buyers. In the national suburban office
market, for example, a total of 27 percent of investors said market
conditions now favor buyers, a four-fold increase from 2007.
Nevertheless, foreign buyers, supported by a weak dollar, remain
focused on acquiring assets in the U.S. In fact, the survey reveals
that Middle Eastern and Australian investment now outstrips that of
Germany, and there is a steady flow of new buyers from all over
On a year-over-year comparative basis, the average overall
capitalization rate for an increasing number of surveyed markets
showed an uptick between the second quarter of 2007 and the second
quarter of 2008, according to the poll. Individual office markets
that witnessed the largest year-over-year increases in average
overall capitalization rates include Phoenix, Suburban Maryland and
Northern Virginia. The biggest increases in overall capitalization
rates are forecast to occur in the national regional mall market,
as well as the Houston and Northern Virginia office markets,
according to estimates. On average, overall capitalization rates
for all the markets surveyed are expected to increase about 35
basis points over the next six months.
The commercial rental market, while still a bright spot in U.S.
real estate, has dimmed recently. Vacancy rates are inching up
across all property sectors, and rental growth is slowing. In the
second quarter, the initial-year market rent change rate declined
in 14 of 18 office markets in the survey, twice as many as in the
fourth quarter of 2007. The survey shows that few dominant office
markets are bucking this trend. Manhattan's initial-year market
rent change rate fell for the third quarter in a row after an
average quarterly gain of 161 basis points in the preceding 12
months. In San Francisco, the initial-year market rent change rate
dropped 228 basis points in the second quarter. "It's now clear
that problems in the residential housing market, which is
undergoing its most serious downturn in two decades, and a slowdown
in U.S. economic growth have spilled over into the commercial real
estate market," said Smith.
According to the survey, the office market in cities including
San Francisco, Philadelphia and Fort Lauderdale, Florida, are in
contraction. Other Florida cities, including Miami, Tampa and
Jacksonville, are declining, as are San Diego and Sacramento,
California. Few major office markets are expanding. The exceptions
include Honolulu and Hartford and Stamford, Connecticut.
In Los Angeles, which has mostly bucked industry declines,
investors expect office property values to rise an average of 2.6
percent during the next 12 months, more than in the first quarter
of 2008. Other markets expected to realize strong value growth, on
average, over the next 12 months include Manhattan at 5.6 percent,
Denver at 4.0 percent and Southeast Florida at 3.2 percent. In
contrast, investors expect office property values, on average, to
decline in the office markets of Charlotte (-5.0 percent), Chicago
(-1.3 percent), and Northern Virginia (-0.1 percent).
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