NEW YORK, Dec. 16, 2008 (GLOBE NEWSWIRE) -- As the U.S. economy grapples with one of the worst recessions in history, investors in commercial real estate are extremely anxious about the near-term performance of the industry, which continues to weaken and now must contend with staggering job losses that were much worse than expected and will surely upset underlying fundamentals and property values, according to the fourth quarter 2008 PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r), released today.
"One message came across loud and clear from investors: the nation's harsh economic environment will continue to negatively impact commercial real estate values throughout 2009," said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers. "Large job losses were noted in the retail, services, and professional-and-business-services sectors in November 2008, leaving investors nervously waiting for the frequently mentioned 'lag effect' to further hurt both fundamentals and values."
The trepidation among investors is noted by the use of much lower market rent growth rate assumptions in their valuation analyses. The PricewaterhouseCoopers report finds that initial-year market rent change rates have declined an average of 175 basis points during the past year. Markets that posted the highest annual drop in this key indicator were the Manhattan office market (-213 basis points), the Denver office market (-200 basis points), and the San Francisco office market (-177 basis points).
The report also indicates that overall capitalization rates are expected to increase over the next six months for each Surveyed market. Increases range up to 200 basis points and average 45 basis points. So far, it has been extremely difficult for investors to figure out where overall capitalization rates sit since sales activity has dropped 75.0% year-over-year. Until the bid-ask pricing gap closes and liquidity returns to the industry, sales activity will remain subdued for the four major sectors -- apartment, office, retail, and industrial.
An analysis of the national real estate cycles of the four major property types from 1999 to 2012 suggests that certain sectors will rebound faster than others. The less volatile sectors have traditionally been multifamily and warehouse, which recover prior to the retail and office sectors. Accordingly, the value recovery will likely first begin with property types that move goods and provide shelter, versus those that sell goods and create service.
Highlights from the report include:
* The inability to finance deals is partly to blame for the
collapse of sales activity in 2008. Many other forces were at
play including the failure of buyers and sellers to agree on
pricing and the denominator effect.
* Investors of all types are seeking a safe haven in cash due to
the volatility and uncertainties across all markets. As a
result, real estate may no longer be the favored asset class.
* Private investors have been the most hampered by the credit
crunch. However, they have emerged as the most active capital
sector, accounting for 47.0% of all property acquisitions in
2008.
* In the public sector, share prices of REITs have been decimated
and their acquisitions and developments have been put on hold.
While most REITs are well capitalized, a few are jeopardized by
their debt burden and are resorting to selling assets, a trend
that will only intensify in 2009.
The report also points out that patience will be paramount to allow the current economic recession to correct itself. For now, owners need to hang onto their assets and continue to ride out the storm until a correction takes place. "The key to weathering this storm will be finding ways to mitigate value losses while holding onto assets until the inevitable recovery," said Susan M. Smith, editor-in-chief of PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) and a director in PricewaterhouseCoopers real estate business advisory services group. "Investors realize that real estate needs to again be viewed as a tangible asset where location, quality, and tenancy are keys to driving and sustaining value."
Among the significant developments in select sectors during the past quarter:
* Regional malls weaken -- Reduced consumer spending, weak retail
sales, store closures, and a host of negative economic issues
are keeping the majority of investors from eagerly pursuing
opportunities in this market. While certain investors expect
property values to fall as much as 15.0%, some believe values
will slip approximately 5.0% when you combine declining
occupancy and rising overall cap rates.
* Power centers fail to pick up the slack -- A decline in consumer
spending and tighter lending requirements for many merchants
have combined to delay store openings, postpone hiring plans and
force certain "big-box" retailers into bankruptcy. As a result,
pursuing such assets is a low priority for investors.
* Some buyers for strip shopping centers -- Well-located strip
centers anchored by top supermarket chains will continue to draw
necessity shoppers, and as a result, some investors will likely
continue to focus on acquiring grocery-anchored strip shopping
centers in the year ahead.
* Central business district (CBD) and suburban office markets
weaken -- The national CBD and suburban office markets continue
to feel the impact of the slowing economy, and with back-to-back
monthly employment losses in various sectors that demand office
space, underlying fundamentals will continue to stumble in the
coming year. Due to the lag effect on this sector, many
landlords will not feel an immediate impact, but it will be
troublesome next year.
* Apartment sector battles rising vacancy -- During this period of
economic turbulence, many apartment owners are focusing their
energy on preserving income streams on existing properties as
moving back in with parents or rooming with friends diminishes
demand. While some markets will see a boost in demand as the
housing crisis lingers, such areas are few and far between for
now.
About the PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r)
PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r), now in its 21st year of publication, is one of the industry's longest continuously produced quarterly surveys. The current report provides overviews of 29 separate markets, including ten national markets -- regional mall, power center, strip shopping center, CBD office, suburban office, flex/R&D, warehouse, apartment, net lease, and medical office buildings. It also includes a review of 18 major U.S. office markets, including, Atlanta, Boston, Charlotte, Chicago, Dallas, Denver, Houston, Los Angeles, Manhattan, Northern Virginia, Pacific Northwest, Philadelphia, Phoenix, San Diego, San Francisco, Southeast Florida, Suburban Maryland, and Washington, DC.
The fourth quarter 2008 report also features up-to-date commentaries concerning Technology News and Trends, Real Estate Capital Markets, Economic News, Domestic Self-Storage, and National Development Land Market.
Information about subscribing to PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) can be found at http://www.pwcreval.com/. Members of the media can obtain an electronic copy of the full report by contacting Steve Maguire at (781) 878-8882 or smaguire@hubbellgroup.com.
About PricewaterhouseCoopers Real Estate Services Group
PricewaterhouseCoopers real estate services group is part of the U.S. firm's financial services practice, one of the leading providers of integrated professional services to major financial services organizations. Its integrated approach to problem-solving involves an international network of real estate accounting, tax and business advisory professionals who can quickly mobilize to form highly qualified teams to respond to a client's opportunity or challenge. Its global real estate professionals offer in-depth experience in a wide range of financial accounting and reporting issues; global tax solutions; investment fund structuring; capital market transactions; securitization issues; technological applications; systems and operations; due diligence and transaction support; and valuation management.
About PricewaterhouseCoopers
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