NEW YORK, Sept. 27, 2007 (PRIME NEWSWIRE) -- While much of the media seems transfixed by the reported meltdown in the nation's housing market, underlying fundamentals remain relatively strong across most sectors of the commercial real estate industry, according to the newly released PricewaterhouseCoopers 3Q 2007 Korpacz Real Estate Investor Survey(r).
"Despite a slowdown in employment growth and a slight rise in the U.S. jobless rate, the national central business district (CBD) office market continues to perform strongly," said Susan M. Smith, Editor-in-Chief, PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r). At the same time, strong investment demand and favorable underlying fundamentals are keeping buyers and sellers very active in the national suburban office market, she noted.
"There's no question there has been some negative impact as a result of the problems arising from the subprime residential market downturn," said Tim Conlon, PricewaterhouseCoopers' U.S. Real Estate Sector Leader. "That said, while the volume of investment levels has slowed, the gloom-and-doom scenarios predicted for the commercial real estate market have yet to materialize and the underlying fundamentals continue to be fairly strong."
The quarterly survey of professionals involved with the real estate industry, including institutional investors, REITs, pension funds, mortgage bankers, developers and insurance companies, identifies trends across key real estate industry sectors. Other notable findings include:
* Investment demand for CBD office assets should remain strong, especially for Class-A properties located in major U.S. coastal cities, such as New York, San Francisco, Seattle and Washington, DC. * "Condo reversion" activity -- properties previously converted to condos, which are now returned to the rental market -- is undermining the health of the apartment market in a number of regions. * Transactions involving strip shopping centers have been quite voluminous during the past few months, mainly due to an increase in corporate mergers and acquisitions. Including privatizations, more than 1,600 strip centers traded for $5 million or more during the first six months of 2007.
Additional findings, by sector, include the following:
Retail
Despite apparently solid interest from would-be investors, a lack of quality offerings is limiting acquisition activity in the national regional mall market, as many of the best-performing regional malls are owned by top public owners and are rarely traded. Those that do come up for sale are quickly and aggressively acquired. At the same time, lifestyle centers are increasingly sought after by investors, with the transformation of existing regional malls into lifestyle centers and/or mixed-use properties being seen as ongoing trends.
Investors also are showing strong interest in national power center assets as numerous big-box and discount retailers continue to perform well -- despite a slowdown in consumer spending caused by higher interest rates, eroding credit quality and larger levels of consumer debt. A number of investors, in fact, are looking toward new construction as an alternative to acquiring existing power center assets.
In the national strip shopping center market, the pace of transactions has been steady due to ongoing M&A (merger and acquisition) activity, although a slowdown in single-asset sales activity is thought to be more the result of higher prices than a lack of investor interest.
Office
So far, a less than robust showing in the nation's employment growth rate has not led to any slowdown in the national CBD office market. Limited additions to supply, along with fairly steady increases in office-based employment have enabled the national CBD office market to continue to tighten. As a result, investors continue to show strong interest, especially for assets located in major cities along the East and West Coasts of the U.S.
In the national suburban office market, strong investment demand and solid fundamentals are encouraging a high level of activity among buyers and sellers. As a result, a number of investors predict that sale prices will continue to increase especially for top-performing suburban office markets, such as Portland, Southern California, Boston and St. Louis.
Flex/R&D
Investors in the national flex/R&D market are seeing added interest from would-be suburban office tenants searching for competitive alternatives in the face of tighter vacancy rates and rising rents in the national suburban office market. In fact, in many West Coast suburbs, such as San Diego and Orange County, vacancy rates for flex/R&D are lower than traditional office vacancy rates. For example, in San Diego, flex/R&D space posted a vacancy rate of 8.9 percent in the second quarter of 2007, compared to a rate of 10.9 percent for the office sector.
Warehouse
Despite demonstrating some initial weakness at the start of this year, underlying fundamentals for the national warehouse market are again showing strength. Dominant warehouse markets continue to line both the East and West Coasts and include Los Angeles, San Diego, Miami, Tampa, and Northern New Jersey. Vacancy rates for these top-performing markets range in the low single-digit range and present challenges to existing and prospective large-space users. Healthy fundamentals across much of the national warehouse market continue to lure investors who like the steady returns and appreciation rates typically offered by this sector.
Apartments
An increase in apartment vacancy rates nationally is expected to hinder rental growth in many individual markets through the end of 2007. "Condo reversion" activity, in which properties previously converted to condos are returned to the rental market, are providing a steady increase in supply in a number of markets. Markets with the highest level of condo reversion activity include Phoenix, Baltimore, Orlando, and the Washington, DC/Northern Virginia suburbs. At the same time, some rental growth potential is perceived in certain technology-driven markets, such as Northern California and Seattle.
Net Lease
After a spate of record growth in 2006, the national net lease market has largely stabilized, particularly in both the 1031exchange and tenant-in-common (TIC) arenas. In the 1031- exchange sector, the limited availability of high-quality retail properties, the "bread and butter" of 1031 deals, along with higher prices for investment-grade properties, has led to tightening in the market. In addition, more stringent underwriting standards by lenders are putting pressure on achievable returns in the net lease marketplace. At the same time, the TIC sector is seeing some heavy competition among some formidable players who are attempting to navigate the unstable debt environment and achieve adequate yields for their investors.
National Lodging Highlights
High levels of interest in lodging properties of all types -- luxury, economy/limited-service, full-service and extended stay -- continue to pervade the U.S. lodging industry. Hotel revenues in 2007 are expected to top $48 billion, which represents the fourth consecutive year of record sales and a 37 percent increase compared to 2006 lodging industry revenues of approximately $35 billion. Investors continue to acquire U.S. hotels as single assets, portfolios, as well as through mergers and acquisitions.
At the same time, acceleration in new construction is both underway and planned. Currently, there are more rooms in all phases of the construction pipeline than there have been at anytime since the late 1990s. While there appears to be no immediate threat of oversupply with supply growth continuing below the long term average percent, some investors have expressed concerns that supply will soon pull ahead of demand in certain markets. However, because new supply is concentrated in the chain scale, segments that are performing the best from an average room rate perspective are helping to alleviate concerns. In addition, high land prices, high construction costs and longer times for obtaining financing are expected to delay, postpone or cancel some projects.
The PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r), now in its 20th year of publication, is one of the industry's longest continuously produced quarterly surveys. The current report provides detailed overviews of 29 separate markets, including the national retail markets (regional mall, power center and strip shopping centers); overviews of 17 major office markets, including the recently added markets of Denver, Phoenix and San Diego; and national overviews of the CBD and Suburban Office, Flex/R&D, Warehouse, Apartment, Net Lease, and National Lodging markets. The report also features up-to-date commentaries concerning Valuation Issues, Technology News and Trends, and Economic News, as well as a special feature by Dan Winters, Managing Principal of Evolution partners on "Green Building -- a Strategic Imperative."
Information about subscribing to the PricewaterhouseCoopers Korpacz Real Estate Investor Survey(r) can be found at www.pwcreval.com. Members of the media can obtain an electronic copy of the full report by contacting Thomas Derr at thomas.derr@us.pwc.com or (646) 471-8268.
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