NEW YORK, Jan. 11, 2007 (PRIME NEWSWIRE) -- Improving occupancy levels, rising rental rates and a stable economy continue to buoy the U.S. commercial real estate marketplace, but the actual number of completed transactions has begun to tail off markedly, according to PricewaterhouseCoopers' Fourth Quarter 2006 Korpacz Real Estate Investor Survey(r).
Sales of office properties continue to show record numbers, but transactions in other sectors -- particularly the retail, apartment and industrial segments -- decreased significantly from the previous year, according to PricewaterhouseCoopers LLP.
"Fundamentals are strong; the economy is stable; and capital remains plentiful," said William E. Croteau, U.S. Real Estate Sector leader for PricewaterhouseCoopers. "Those factors, combined with a lack of alternative investment opportunities, are encouraging a growing number of property owners to hold onto their existing assets and enjoy the benefits that arise from improving fundamentals."
"Some of the decline may be due to a shortage of quality offerings," added Peter F. Korpacz, director of Global Real Estate Research for PricewaterhouseCoopers. "While there is no lack of qualified buyers, many seem to be encountering an array of mitigating challenges -- such as undesirable tenant mixes, poor locations, heightened competition and unrealistic pricing."
The quarterly survey of professionals involved with the real estate industry, including REITs, pension funds, institutional investors, mortgage bankers, developers and insurance companies, identifies trends across key real estate industry sectors. Other key findings include:
-- Investors continue to favor the East and West Coasts for their
investments, particularly growth-constrained "mecca" coastal
cities such as New York (Manhattan only), Washington, DC, Miami,
Los Angeles and Seattle.
-- So-called "smile markets" are also in favor -- cities that form
a smile along the nation's southern tier when a connecting line
is drawn from the West to East Coasts. These include Phoenix,
Austin, Atlanta, Charlotte, Northern Virginia and Boston.
-- Higher mortgage rates have turned some would-be homebuyers back
into renters, leading to a decline in apartment vacancies and a
resurgence of investor interest, especially for Class-B,
moderate-income apartment assets. With rental rates rising in
many individual markets, investors suggest acquiring assets in
the most expensive housing markets, such as San Francisco, New
York, Los Angeles and Boston.
Additional findings, by sector, include the following:
Office Markets
Declining vacancy rates, rising rental rates and diminishing concessions reflect a continuing positive outlook for the national Central Business District (CBD) office market. Nationwide, the overall vacancy rate fell to 11.0 percent in the third quarter of 2006, a figure that represents an 80-basis-point dip from the prior quarter and an astounding 230-basis-point decline from the third quarter of 2005, the survey found.
In fact, 23 of the 30 CBD markets tracked reported year-over-year declines in overall vacancy, ranging from 10 basis points (Fort Lauderdale, Fla.) to 400 basis points (Hartford, Conn.), with an overall average decline of 120 basis points. Among the downtown office markets posting the most impressive year-over-year declines were Philadelphia (down 200 basis points), Atlanta (down 200 basis points) and downtown Manhattan (down 220 basis points).
Likewise, underlying fundamentals in the national suburban office market continue to trend positively, as leasing activity remains steady in the face of limited new construction. In the third quarter of 2006, the overall vacancy rate reached 14.83 percent in the national suburban office market, representing a 256-basis-point drop from the prior year, and an astounding 486-basis-point drop from two years earlier.
Generally speaking, the tightest individual suburban office markets tend to be along the East and West Coasts, and include Los Angeles (7.3 percent overall vacancy rate), Tampa (8.7 percent), San Diego (9.5 percent), and Northern Virginia (9.5 percent). These markets also remain prime targets for investment dollars, the survey reports.
Warehouse Markets
The national warehouse market continues to show signs of improvement, thanks to steady leasing activity from both large- and small-space users and with the greatest amount of demand focused along the country's larger coastal ports, such as Long Island, New Jersey and Portland, Ore., where availability rates ranged from 5.6 percent to 6.5 percent in the third quarter of 2006.
Flex/R&D Markets
While many investors still consider Flex/R&D properties to be more risk-laden than traditional warehouse investments, an upswing in R&D manufacturing and improving fundamentals in various markets are helping to keep investors interested in Flex/R&D assets. Indeed, respondents to PricewaterhouseCoopers/ULI Emerging Trends in Real Estate(r) 2007 survey viewed R&D industrial assets as one of the most promising areas of opportunity for unleveraged returns in 2007 (9.09 percent). Only full-service hotels (10.23 percent) and limited-service hotels (10.30 percent) are expected to bring greater returns in the coming year. Individual Flex/R&D markets cited as potential "hotbeds" for investment include Silicon Valley, Silicon Forest (suburban Seattle), Boston's Route 128 and Austin.
Retail Markets
Regional Mall
The retail industry as a whole continues to perform well and attract investors' interest, but the actual number of completed transactions in the national regional mall market dropped dramatically over the past year. During the first nine months of 2006, regional mall acquisitions totaled $2.8 billion -- a 53.0 percent decline from the previous year.
Power Centers
In the national power center market, continued strong investment demand is being fueled by healthy year-over-year retail sales growth at many big-box and discount retailers. Investors looking to acquire power center assets remain largely focused on properties located near established regional malls, and/or anchored by top national merchants, and/or "shadow-anchored" by dominant retailers such as Wal-Mart, Target and The Home Depot.
Strip Shopping Centers
The national strip shopping center market has experienced a sharp decline in large portfolio transactions over the past year, resulting in a significant drop in sales volume. Sales of significant retail properties totaled $9.2 billion in the third quarter of 2006, down 18.0 percent from the same period in 2005. Concurrently, for the first time in five quarters, the number of strip shopping center offerings surpassed the number of closings in the third quarter of 2006. While the drop in sales activity seems to be largely a reflection of a lack of quality assets rather than investor interest, aggressive pricing for the best assets available for sale is also a factor.
Net Lease Market
Thanks to historically low capitalization rates, competition remains intense among buyers in the national net lease market -- particularly in the Class-A sector -- although market conditions may be starting to favor buyers of Class-B and Class-C net lease properties. The number of available assets in the national net lease market increased for the fourth consecutive quarter, as many investors looked to dispose of their assets while capitalization rates remained relatively low.
Top-rated states for net lease property investments include Texas, Florida, California, Indiana and Georgia, which accounted for 45.3 percent of the total net lease offerings in the third quarter of 2006. Historically, the most difficult states for investment have been mainly in the Northeast, a trend which continued during the third quarter of 2006. New Jersey, Massachusetts, Virginia, Pennsylvania, and Iowa offered the fewest investment opportunities in the net lease market during the last quarter.
Apartment Markets
A strong wave of investment capital continues to flow into the national apartment market, reflecting continued positive rent growth trends. All told, sale transactions in this sector totaled $61.4 billion through the third quarter of 2006.
Investors continue to favor multi-family property investments due to this sector's strong market fundamentals. As a result of positive economic and demographic trends, as well as the recent erosion in single-family housing affordability, many individual apartment markets are experiencing rent growth. During the third quarter of 2006, the top three market areas for rent growth were San Jose, Tampa and New York.
Despite these positive trends and a national apartment vacancy of only 5.4 percent, there is concern in various markets about the return of condominium units to the rental supply now that conversion opportunities have virtually dried up. For example, between the third quarter of 2005 and the third quarter of 2006, the number of condo conversions fell from 54,700 units to 7,400 units. In markets where conversion activity was particularly rife, such as South Florida and California, the return of numerous condo units to the rental market poses a significant threat to apartment vacancy rates. Any upward shift in vacancy, however, should be less severe in markets that reflect low vacancy rates and minimal additions to supply due to the recent condo conversion craze.
National Development Land Market
While few of the country's markets need much new space, some development land opportunities exist. Even so, developers will need to exercise caution for each sector of the real estate industry to maintain a favorable supply/demand balance. In the office sector, strong demand and lofty rental rates favor development in top downtown locations. Unfortunately, land is scarce and the entitlement process can be tedious. In the retail and apartment sectors, urban infill areas are top picks for developers, although escalating land prices and drawn-out entitlement processes can be intimidating. In the warehouse sector, state-of-the-art properties are in high demand in many top port and overspill locations, but high construction costs limit their upside potential.
Domestic Self-Storage Market
Demand in the domestic self-storage market continued strong during the second half of 2006, despite a softening housing market and fears of a slowing U.S. economy. Self-storage fundamentals continued to improve as owners pushed up asking rental rates, physical occupancies increased and fewer facilities offered concessions. At the same time, self-storage REITs and the rest of the self-storage industry posted solid operating results in the third quarter of 2006, following national media attention garnered by the fact that self-storage REITs out-performed the S&P 500 and the Morgan Stanley REIT Index in terms of total returns in 2005.
The fourth quarter 2006 Korpacz Real Estate Investor Survey(r) provides detailed overviews of national retail markets, including regional mall, power center and strip shopping center overviews; overviews of 14 major office markets; and national overviews of the Flex/R&D, Warehouse, Apartment, Net Lease, National Development Land and Domestic Self-Storage markets. The report also features up-to-date commentaries concerning Valuation Issues, Technology News and Trends, Economic News, and the Real Estate Capital Markets.
Each quarterly issue of the survey also contains current, prior-quarter, and year-ago rates, cash flow assumptions, and other criteria used to analyze real estate investments; more than 40 tables, including Yield Comparisons, Dividend Comparisons, Key Value Indicators by Market, Marketing Time, Institutional-Grade vs. Noninstitutional-Grade Property Rates, and Forecast Periods and Growth Rates.
One year online or electronic (PDF) subscriptions to the survey can be purchased for $350 at www.pwcreval.com.
Members of the media can obtain an electronic copy (.pdf) of the full report by contacting Thomas Derr at: thomas.derr@us.pwc.com or phone: (646) 471-8268.
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