Commercial real estate investors reveal a sense of hopefulness and improved sentiment as the economy shows some encouraging signs of improvement, according to the first quarter 2010 findings of PricewaterhouseCoopers’ Korpacz Real Estate Investor Survey.
The report noted that investors find it easier to envision a commercial real estate market recovery today than at any point during the past two years. At the same time, however, investors acknowledge that challenges and concerns still exist.
According to the survey, overall capitalization (cap) rates, a key measure of expectations of property income and value, have started to stabilize and even slightly decline in certain markets and for quality assets.
While occupancy and rental rates have deteriorated significantly in the past two years, surveyed investors anticipate vacancy rates to continue to increase in the coming year but not as steeply as the prior year. In addition, they foresee rental rates continuing to decline in most markets, but to lesser degrees, as property visits and tenant interest show slight improvements across the country.
Consequently, many survey investors continue to use low, and in certain markets negative, market rent change rate assumptions in the initial years of cash flow analyses. While the majority of the surveyed markets report negative average initial-year market rent change rates this quarter, the expected declines are milder in comparison to the prior quarter.
As weak tenant demand lingers, investors surveyed indicate an increasing need to offer prospective tenants free rent during lease negotiations. Overall, just over 91 percent of surveyed investors reported the use of free rent. Last year, this survey figure was 84 percent.
Surveyed investors project that the apartment sector will continue to lead the recovery as value losses have been almost fully recognized, and some multifamily assets are actually showing slight value increases.
The warehouse sector remains weak, according to survey participants, due to an overall lack of demand for goods, while the office and retail sectors continue to struggle as both economy and employment challenges persist.
