Commercial real estate investors are frustrated and disappointed by the lack of quality buying opportunities, according to new quarterly report by Pricewaterhouse Coopers.
The second quarter real estate investor survey found that investors are anxious about the speed and strength of the economic recovery and the uncertainty surrounding the large debt volume coming due in the next two years.
In the quarterly survey, the average overall capitalization (cap) rate, a key measure of investors’ expectations of property income and value, declined in 17 of the survey’s 30 markets over the past three months, an indication that investors perceive less risk in the industry now, particularly for prime properties and better markets.
The ‘bottoming’ of the industry continues to be recognized by investors’ expectations that overall cap rates will either decline or hold steady in most markets over the next six months, the survey found.
Specifically, survey participants forecast overall cap rates to hold steady in 18 of the survey’s 30 markets. Furthermore, the survey data reveals that 13 markets could see overall cap rates decline by as much as 100 basis points in this time period.
Surveyed investors cited potential declines in near-term overall cap rates in the Manhattan office market, the national warehouse market and the national apartment market (all three segments down as much as 100 basis points). For the individual office markets in the survey, average overall cap rates remain lower for central business district (CBD) submarkets than for suburban counterparts, suggesting that investors continue to see less risk and better investment potential in the 24-hour work-live-play aspect offered by many major CBDs.
"While most investors sense that the worst is over in terms of market deterioration, supply greatly outweighs demand across all property sectors keeping overall vacancy rates high and rental rates on a downward trend," said Susan Smith, director, real estate advisory practice, PricewaterhouseCoopers, and editor-in-chief of the survey. "Top-tier locations are showing the most signs of life with respect to tenant interest and recovery potential. However, inspiring leasing trends have yet to fully materialize, further contributing to this sense of market flux."
Surveyed investors said financing has become more readily available for the right borrower seeking quality assets in better markets.
For second-tier markets and non-core assets, debt availability and buyer interest are very limited, according to the survey.
