Survey Finds CRE Investors Refocusing On Strategy as Fog of Uncertainty Begins to Lift
With More Good News Than Bad, Investors Seek to Place Capital Despite Continuing Uneven Recovery
December 19, 2012
With the distraction of the U.S. elections disappearing in the rear-view mirror, more investors are again ready to focus on the opportunities they see in commercial real estate, even though uncertainty remains about the looming fiscal cliff and the political solution to address the nation's rapidly growing debt.
According to the fourth-quarter 2012 PwC Real Estate Investor Survey, investors expect to see an uptick in sales activity in 2013 as property owners cull portfolios to take advantage of the lower capitalization rate environment. Survey respondents expect cap rates to continue to compress in the multifamily sector and begin to dip in sales across all property types.
"The CRE industry continues to show its investment durability as assets command attractive spreads over fixed-income investments and offer more stability than stocks, while most property sectors continue to post occupancy gains and rental rate growth," said Mitch Roschelle, partner with the U.S. real estate advisory practice leader for PwC. "Foreign investors are particularly bullish on U.S. commercial real estate as they look for stable investments during uncertain times abroad."
The real estate industry and corporate America adopted a "wait-and-see" attitude as the U.S. presidential election drew closer and investment demand and the industry's recovery both noticeably slowed at the start of the second half of 2012.
But going into 2013, survey respondents say they see a bit more clarity and optimism even though the nation is still grappling with the fiscal cliff, next year’s debt ceiling debate, a choppy housing recovery, tepid demand for office space and a weak manufacturing sector.
At the same time, most property sectors continue to post occupancy gains and rental rate growth and an era of zero to low new supply is starting to give way to new construction starts in most property sectors.
"We're starting to see good news eclipse the bad news, and that makes us want to invest more capital in CRE assets," noted a participant.
Among office investors, more are starting to accept slower rent growth and have less concern about moving further out on the risk spectrum. Core trophy assets remain the preferred target of both domestic and international investors, however, aggressive pricing and improved fundamentals have resulted in certain investors looking to buy either core properties in strong secondary markets or "less-than-core" in primary markets, according to respondents.
At the same time, overall cap rate compression and assertive bidding are providing incentive for office building owners to sell.
"It's a good time to cull portfolios," noted a participant.
Even the retail sector, not as popular among investors for some time, is seeing cap rates compress. Due to limited new construction, moderate spending on the part of consumers, and stabilizing housing markets, many investors are starting to revisit strip shopping centers and even power centers.
"As yields for well-leased shopping centers have compressed too much, we are considering buying value-add in great locations due to a lack of new supply," said an investor.
Lack of new supply combined with rising tenant demand have caused investor interest in the warehouse sector to surge over the past year, creating both buying and selling prospects. In addition, new construction is occurring in certain warehouse hubs where overbuilding is usually less of a concern, like Miami and Chicago, and in select apartment metros.
However, disciplined CRE construction lending and an overall slow-growth environment are expected to temper thoughts of adding too much new supply to a healing CRE industry, where buyers and sellers may soon be on equal footing.
The CRE recovery remains uneven and very location and sector specific. Still, real estate remains a prime target for investment capital as it continues to perform well relative to alternative investments. The largest percentage of respondents, 34.6%, believe that equity real estate capital will be moderately oversupplied in 2013, while 26.4% feel it will be somewhat undersupplied.
At the same time, interest rates are not likely to shift anytime soon as investors continue to "jockey for position in the capital stack to achieve the best risk-adjusted returns," in the words of a participant.