PWC Director: the Worst May be Over for Commercial Real Estate
Commercial real estate investors expect capitalization rates to stabilize and vacancy rates to level in 2010, according to the quarterly PricewaterhouseCoopers (PWC) Korpacz Real Estate Investor Survey. The news comes as large amounts of capital look ready to invest in the market, according to a director at the business advisory firm. “The worst seems to be over, according to survey participants, as investors suggest that the bottom is near, if not here, particularly for better-positioned markets and assets,” said Susan Smith, director of real estate advisory practice at PWC and editor-in-chief of the survey. PricewaterhouseCoopers provides an array of services as a business advisor. Its survey overviews 30 separate markets across the US. According to the report, investors now see more hope for a recovery in commercial real estate than at any point during the past two years. The optimism comes despite signs of continued deterioration in the market. The amount of 30+ day delinquencies in commercial mortgage-backed securities (CMBS) rose in Q409 to 5.69%, according to the Mortgage Bankers Association. Capitalization rates – or the ratio between the net income from the asset sale and its original price – have started to stabilize and even shrink in certain markets, according to the survey. According to those surveyed by PWC, the new outlook on cap rates could help stabilize values. Over the next six months, participants forecast that the cap rates will hold steady in 19 of the 30 markets. In the previous quarter, participants in the survey held such optimism in two markets. “Following the onset of the recession and the credit crisis, underlying fundamentals were deteriorating and overall cap rates were expanding simultaneously and quickly, causing values to plummet,” Smith said. Surveyed investors do see vacancy rates continuing to increase through 2010, though not as steeply as before. To head off the increases, many investors indicated an increased need to offer some tenants free rent during lease negotiations. Just over 91% of those surveyed reported the use of free rent, up from 84% last year. Participants also said that while sales activity will remain slow in 2010, banks appear more willing to lend despite still conservative underwriting and a need for more equity. The 2010 outlook comes after returns on US commercial real estate investments dropped 17.1% in 2009, the worst returns on record, according to Investment Property Databank (IPD), which monitors trends in underlying market value and returns based on over 3,000 properties from over 45 funds with a value of $102.5 billion at the end of 2009. Despite the poor numbers in 2009, Smith said there is still a “tremendous amount” of capital looking to enter the commercial real estate market. For example, the private equity firm Valeo Fund is recruiting investors to go after $1trn of commercial mortgages set to mature between 2010 and 2013. The move comes as opportunities are beginning to hit the entire commercial market. Researchers at Cushman & Wakefield, a commercial real estate (CRE) services provider, anticipate a 30% climb in global CRE investments in 2010. Write to Jon Prior.