CoStar - Cap Rates Expected to Hold Steady Or Decline in Most U.S. Markets Over Next Six Months According to PwC Survey Respondents. Investors are growing more confident that the commercial real estate industry is moving past the bottom of the cycle as the economy adds jobs and property fundamentals slowly improve, according to the results of the first-quarter 2011 PwC Real Estate Investor Survey. Tracking the expectations of survey respondents for the future performance of the office, retail, industrial and multifamily property sectors from 2011 to 2014, PricewaterhouseCoopers found that investors have a sense that, although real estate is recovering, the pace of the recovery in the U.S. economy has been slow and uneven at best.
As investors become more confident about the long-awaited recovery in occupancy, sales and leasing, however, they're eager to get deals done, noted Mitch Roschelle, partner and PwC U.S. real estate advisory practice leader. "This bodes well for the industry as the volume of capital chasing deals is expected to increase in all sectors as investors work to deploy capital before interest rates rise, overall cap rates increase and the industry shifts more in favor of sellers," Roschelle said. PwC analyzed historical and forecasting data to measure how the inventory of each sector changes over time in relation to the four stages of the real estate cycle, contraction, expansion, recession and recovery. The report surveyed 31 markets, including 10 national markets; and individual product types including regional mall, power center, strip shopping center, CBD office, suburban office, flex/R&D, warehouse, apartment, net lease, and medical office buildings. The report also includes a review of 18 major U.S. office markets and three regional apartment markets, Mid-Atlantic, Pacific, and Southeast.
The report finds that average overall cap rates decreased in 27 of the 31 surveyed markets as signs of recovery emerged for both the economy and the real estate industry. Investors reported the largest quarterly decreases in the regional apartment markets, where average cap rates compressed between 39 and 73 basis points in the first quarter. Cap rate compression continues in sales involving well-located and better-positioned assets with stable rent rolls and limited leasing risk, and an increasing number of investors are expanding their property searches to include secondary markets and impaired assets, the survey found. Due to strong buyer interest combined with increased debt market liquidity, investors expect that overall cap rates will either hold steady or decline in 25 of the survey's 31 markets over the next six months.
The results of the PricewaterhouseCoopers survey corroborate recent analysis by CoStar Group, which publishes a monthly index tracking repeat sales of investment-grade commercial properties. The index jumped 10.6% in January over the same period last year, the largest year-over-year gain since the height of the real estate boom in 2006. The increase in the index for higher-quality properties hit a five-year high in January despite dipping slightly from December, a reflection of how strongly the index has recovered within 12 months. First-quarter CoStar outlooks for the office, multifamily, industrial and retail sectors also showed improving fundamentals in investment sales and leasing activity. Below are PwC survey findings relative to the major property types:
Office - Most of the nation's office inventory will be in recovery by year-end 2011 due to a lack of new supply and signs of falling vacancy for the U.S. office market. Recovery is in sight, with more than 86% of the U.S. office sector passing over the market bottom by year-end 2012. That said, office markets such as Chicago, Las Vegas, Los Angeles and Tampa are expected to remain in recession through 2012.
Retail - Spotty consumer spending and inflation fears will keep the majority of retail inventory, 76.6%, in recession through 2012. A recovery by year-end 2013 will include 77% of retail inventory. Individual retail markets expected to perform better than the overall sector include Long Island, Nashville, and Fairfield County, which are each expected to be in recovery during 2012.
Industrial - Availability rates for the U.S. industrial property are expected to peak in 2011 as tenant demand strengthens in a growing economy. Most industrial stock will be in recovery in 2011 and 2012, nearly 72 and 86.2%, respectively. Rising imports and exports will send a larger portion of industrial inventory into expansion phase in 2013 and 2014 (20.9% and 40.6%) Individual markets that are expected to underperform the sector include Tampa, FL; Akron, OH, Cleveland, and Minneapolis.
Apartments - U.S. multifamily leads the other three sectors handily in terms of recovery. As tighter loan restrictions continue to dampen single-family home-buying, pent-up housing demand will grow the proportion of multifamily stock in the expansion phase through 2014, when it hits 30.2%. Two multifamily markets, New Orleans and Syracuse, NY, aren't expected to enter expansion over the near term.
