U.S. Commercial Real Estate Investors Turn Bullish on Office Sector for Acquisitions, According to Latest PwC Real Estate Investor Survey™

NEW YORK, Dec. 20, 2011 /PRNewswire/ -- As 2011 comes to a close, commercial real estate investors continue to seek buying opportunities with the office market gaining increasing interest, despite a mixed bag of improving commercial real estate fundamentals, according to the fourth quarter 2011 findings of the PwC Real Estate Investor Survey, released today.

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According to the report, buying opportunities beyond the core markets remain tricky due to a protracted recovery outlook for both the U.S. and many secondary markets.  Surveyed investors cite that commercial real estate continues to offer attractive yields compared to alternative investment vehicles.  In the office sector, investors are bullish regarding their prospects for tenant retention and expect office rent growth in many markets in the coming year.

"Despite a sluggish U.S. economic outlook, the majority of surveyed investors view commercial real estate as favorably priced and a good play," said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. "The bullishness on the part of  investors in the office sector comes as more office tenants are staying put and prospects for rent growth are improving.  Looking ahead to 2012, our report suggests that investing in U.S. commercial real estate is an attractive play and will gain increasing global attention due to its hard asset nature and current income-producing characteristic, along with its total return potential."

Office Sector Tenant Retention & Rent Growth Prospects

The above chart illustrates the improving view of surveyed investors with regard to their ability to retain existing office tenants and increase rental rates as the office sector slowly recovers.  As the expectations of tenant retention approach the 5-year average, rents are poised to increase further. Tenants typically leave to find a better deal, but they typically opt to stay put when rents are rising since they can get better terms from their current landlord.  In addition, moving costs can add up and relocations can displace some employees.

The fourth quarter survey findings indicate that office markets that have a strong tech or energy sector tenants are piquing investor interest.  At the same time, government cutbacks are making some investors hesitant about government -dependent cities, such as Washington DC.  Average office rent growth assumptions reported by surveyed investors this quarter show promise for many office markets in the coming year, led by San Francisco (5.75 percent), New York (5.21 percent) and the Pacific Northwest (4.17 percent).

The average overall capitalization (cap) rate, the initial return anticipated on an acquisition and a reflection of an investment's anticipated ownership risk, decreased in 22 of the 31 surveyed markets and marks the sixth consecutive quarter of decreasing average overall cap rates.  Furthermore, as cap rates continue to compress in core markets investors are turning to secondary markets to enhance yields.  Survey participants are cautious regarding these secondary markets and view them as tricky since improving fundamentals vary market to market and in-depth local knowledge is a key to success.   

Apartment Sector Poised for Development Boom in 2012

According to survey findings, the apartment sector is nearly fully recovered, driven by low vacancy levels in apartments and a continued shift towards renting versus buying homes.  This strong improvement in fundamentals, low vacancy and a historically low rate of home ownership, pave the way for development of rental apartments.  Construction financing remains somewhat available and low interest rates create an additional incentive for developers to start projects sooner than later.

"Surveyed investors continue to view the apartment sector as an attractive play in delivering steady cash flows driven by solid rental demand and rising rents," stated Susan Smith, editor-in-chief of PwC's quarterly survey.  "As a result, investors view this sector as a hotbed for further investment activity.  While government-sponsored entities Fannie Mae and Freddie Mac have historically propelled sales activity in this sector as the primary sources of debt, stellar apartment market fundamentals are attracting debt capital from other sources, such as banks and life companies, increasing the competitiveness among lenders and buyers."

Information about subscribing to the PwC Real Estate Investor Survey can be found at www.pwc.com/us/realestatesurvey. Members of the media can obtain an electronic copy of the full report by contacting Scott Cianciulli at (212) 986-6667 or [email protected].

About the PwC Real Estate Investor Survey™

The PwC Real Estate Investor Survey, now in its 24th year of publication, is one of the industry's longest continuously produced quarterly surveys. The current report provides overviews of 31 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. The report 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. In addition, the report covers three regional apartment markets - - Mid-Atlantic, Pacific, and Southeast. 

The fourth quarter 2011 report also features up-to-date information relating to forecast periods, structural vacancy replacement reserves, forecast values, tenant improvement allowances, and vacancy assumptions. In addition, each issue of the survey contains over ten tables of market data focusing on value expectations, tenant improvement allowances, forecast periods, structural vacancy, and growth rates. 

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SOURCE PwC