Current state of the commercial real estate market according to PwC
Looming defaults could jump-start stalled distressed commercial real estate buying opportunities, according to PricewaterhouseCoopers Korpacz Real Estate Investor Survey™
Lack of opportunity to purchase quality assets surprises investors
Commercial real estate sectors expected to deteriorate through 2010
NEW YORK, September 15, 2009 – Despite a still-struggling U.S. economy, ill credit markets, deteriorating property fundamentals, and precipitous declines in commercial real estate values, most equity investors have remained on the sidelines waiting to capitalize on forced sales and more motivated selling on the part of distressed owners, according to the 2009 third quarter findings of PricewaterhouseCoopers' Korpacz Real Estate Investor Survey™, released today. The report finds that investors anticipate near-term defaults combined with looming due dates on CMBS (commercial mortgage backed securities) maturities to jump-start distressed buying opportunities during the next year.
Buyers Wait Patiently For Opportunities
So far, the de-leveraging of the commercial real estate industry has disappointed many investors who have been waiting patiently to acquire quality, stable assets at distressed pricing.
“Investors seem surprised at the lack of quality buying opportunities given the problems in the financial markets and the continued weakening of the industry's fundamentals,” said Susan Smith, director, real estate advisory practice, PricewaterhouseCoopers, and editor-in-chief of the Survey. “Some investors sense that near-term defaults with commercial banks will allow them to acquire quality assets at steep discounts, as banks may no longer be able to continue to ‘pretend and extend’ troubled loans and would be forced to place assets up for sale.”
While some investors are looking to the $153 billion of CMBS loans due in 2012 to spur buying opportunities, commercial banks account for a much greater percentage of the total looming debt and could provide distressed sales sooner than 2012.
“It appears many banks are playing a ‘timing game’ attempting to replenish their capital reserves in anticipation that the economic recovery will bolster property values. This may be a risky proposition given that commercial real estate's performance often lags what happens in the economy and in this game, the banks can ultimately lose,” added Susan Smith.
Surveyed investors believe the massive amount of leverage used to fuel the buying frenzy during the peak of the cycle in 2006-2007 will greatly increase the number of commercial properties for sale primarily due to owners who are unable to cover their debt service obligations and incapable of refinancing.
If such buying opportunities do come to fruition, the next challenge for investors will likely be asset pricing. The report cites that a bid-ask pricing gap still exists across all property sectors and geographies. In addition, the unraveling of the debt markets appears to be keeping offering bids from buyers low. The industry's current challenges are also keeping some investors focused on asset management and value preservation rather than on new acquisitions.
Key Sector and Regional Highlights
Overall, surveyed investors anticipate further deterioration in the underlying fundamentals of the commercial real estate industry through the remainder of 2009 and into 2010. Investor pessimism in the industry's near-term performance is evidenced by the use of much lower market rent change assumptions in cash flow analyses. All of the 28 surveyed markets reported a decline in the average initial-year market rent change. For certain property sectors and geographic areas, the anticipated declines in market rent are steep. In the national suburban office market, surveyed investors expect market rent to drop as much as 20 percent in the coming months. Other sharp declines are anticipated for the following markets: national CBD office (as much as 10 percent), national power center and national warehouse (as much as 10 percent), and national regional mall (as much as 5 percent).
For the Survey's office markets, investors expect the biggest near-term market rent declines in both Manhattan and San Francisco (as much as 20 percent) and Phoenix (as much as 15 percent). Boston, Chicago, Denver, Los Angeles and San Diego each report expected declines of as much as 10 percent. In contrast, market rent is expected to remain relatively flat for the office markets of Dallas, Northern Virginia and Pacific Northwest.
In the U.S. lodging industry, the effects of cautious spending by businesses and consumers is expected to continue to negatively impact occupancy and revenue. The Survey projects overall lodging demand to decrease 5.3 percent in 2009. Furthermore, occupancy levels and average daily rates (ADR) in the second half of 2009 are expected to remain below last year's levels.
Little Relief in Sight
The PricewaterhouseCoopers survey finds that the majority of the commercial real estate industry is expected to remain in recession through 2011. While an industry-wide recovery is not expected to begin until 2012, the pace of the recovery will vary for each property sector, as well as across individual geographies. In the industrial and office sectors, a more pronounced recovery is expected to materialize in 2011, but is not expected to dominate these sectors until 2012. In the retail sector, the recession phase of the cycle is expected to linger through 2011, giving way to a slight recovery in 2012. In contrast, the U.S. multifamily sector is expected to lead the industry out of the recession as its recovery starts to take hold in 2010 and continues through 2012. .
Individual office markets highlighted by the Survey as expected to recover ahead of the industry include Washington, DC, San Francisco, Philadelphia and Long Island. Office regions that may suffer longer from Survey indications include Sacramento, Denver, Cleveland and Fort Lauderdale. In the retail sector, the Survey notes an earlier entrance into recovery is expected for only a few regions, including Oakland-East Bay, Fort Lauderdale, Nashville and Houston. On the other hand, several multifamily regions show expected persistent strength, such as Portland, Los Angeles and Minneapolis. And in the warehouse sector, West Coast cities are expected to lead the recovery charge, including the cities of Oakland, Portland, Salt Lake City and Orange County.
Information about subscribing to PricewaterhouseCoopers' Korpacz Real Estate Investor Survey™ can be found at http://www.pwc.com/. Members of the media can obtain an electronic copy of the full report by contacting Scott Cianciulli (212) 986-6667 or cianciulli@braincomm.com.
About the PricewaterhouseCoopers'Korpacz Real Estate Investor Survey™
PricewaterhouseCoopers' Korpacz Real Estate Investor Survey™, now in its 22nd year of publication, is one of the industry’s longest continuously produced quarterly surveys. The current report provides overviews of 28 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 third quarter 2009 report also features up-to-date commentaries concerning Technology News and Trends, Economic News, the Gaming Industry, the Senior Housing Industry, and the National Lodging Market, as well as information relating to valuation issues in the industry, such as rent spikes, overall cap rate analyses, management fees, and replacement reserves.
About PricewaterhouseCoopers' Financial Services Group
PricewaterhouseCoopers' (PwC) financial services group is a leading global provider of audit and assurance, business advisory and tax services to organizations in all financial services industry sectors, including banking and capital markets, insurance, investment management and real estate. PwC has a worldwide network of 34,000 professionals -- 4,500 located in the United States -- who are dedicated to the financial services industry.
About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Additional contacts
Ray Yeung / Scott Cianciulli
Brainerd Communicators, Inc
+1 (212) 986 6667
