After three years of dislocation and unprecedented loss, commercial real estate industry investors and professionals are hinting at hopeful signs of tempered commercial real estate market improvements, according to a recent survey.
Boston was named one of the "markets to watch" in the "Emerging Trends in Real Estate 2011" report, released by PwC US and the Urban Land Institute (ULI).
"This venerable 24-hour city registers high marks for livability, controlled development, and a highly educated labor force, but lacks economic vibrancy. Office rents didn’t drop precipitously off pre-crash 2007 highs, but remain well below 2000 peaks, and local brokers predict only a slight turnaround in 2011," the report found.
The report also found apartment rents in the Hub are expected to "track back up, as expensive for-sale housing keeps tenant demand high for multifamily units, and hotels show life."
The survey indicated a lowering of performance expectations nationwide, anticipating high single-digit returns for core properties and mid-teen returns for higher risk investments.
Lenders with strengthening balance sheets will step up foreclosure activity and dispositions of properties during 2011 and 2012, helping values reset 30 percent to 40 percent below 2007 peaks, according to the report.
"The market is predicting extreme bifurcation as the capital flight to quality creates a greater separation between the trophy and less desirable assets," said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. "Well-located and well-tenanted properties that can generate strong cash flow over the next several years are exactly what buyers and lenders want, according to survey respondents. As a result, prime apartments and office buildings in gateway cities are generating the most attention from the increasing pent-up sidelined capital."
The report indicates debt markets thawing further in 2011 as banks continue to strengthen balance sheets, take their losses and step up lending, resulting in higher transaction volumes. Borrowers are expected to have improved chances to obtain refinancing if they own relatively well-leased cash flowing properties. But overleveraged owners dealing with high vacancies and rolling down rents may face more uncertain prospects in the credit markets, including the increasing likelihood of foreclosure.
