Updated PwC/ULI Report Finds That Local Investors and REITs Will Be Greater-Than-Expected Buyers Through Year End
In spite of the lingering debt crisis in Europe and other economic storm signals, the spirits of CRE professionals have brightened considerably according to a mid-year update of the annual Emerging Trends in Real Estate report, an influential survey compiled by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI).
Last fall, results from the PwC/ULI survey presciently warned that the industry should be prepared for sporadic and uneven growth in "a slowing, grind-it-out economic recovery." Last month, PwC/ULI re-interviewed 195 of the more than 950 investors, developers, property company representatives, lenders, brokers and consultants surveyed for the original report released last October.
Somewhat surprisingly, participants in the most recent survey were considerably more optimistic in their outlooks for real estate company profits, investment markets and financing for the second half of the 2012.
What factors have contributed to the improvement in CRE industry sentiment since last fall?
"I think investors are looking for stable asset investments, and they're finding that in strongly leased Class A properties," said Chuck DiRocco, director of real estate research at PwC. "Meanwhile, corporate profits continue to grow. They might not be hiring right now, but they'll continue to pay rents, and the interest in those properties continues to grow."
Interviewees expect that CRE companies will share in the overall upswing in corporate profits, with the number of participants forecasting good-to-excellent profits for the rest of 2012 increasing over 7.5% from the original survey, while the number of those predicting abysmal to fair earnings shrank by about 10 percentage points from 37% to about 27%.
Significant changes in sentiment in the most recent survey included the following:
- Respondents still expect private equity and foreign investors to be the most active property buyers, but private local investors and public equity REITs will make a larger share of purchases than previously expected.
- Insurance companies continued to be number one source of debt capital value in the mid-year update. However, government-sponsored enterprises increased 11.5% from the original survey published in November.
Strength in the rebounding commercial mortgage-based securities market, commercial banks, and mezzanine lenders all pointed to improved debt availability, those interviewed said. According to Commercial Mortgage Alert, U.S. CMBS deals total $10.8 billion year to date, up over 12% year-over-year.
While the increase in securitized lending was positive, the volume pales in comparison to what is needed to provide liquidity -- and thus support asset pricing -- in secondary and tertiary metros and for average-quality assets, according to Hans Nordby, managing director of Property & Portfolio Research (PPR), a CoStar company.
"This is especially true in light of tight bank lending in smaller towns and rural areas, as the big national banks focus on gateway markets and institutional properties, and small banks struggle to work out existing bad CRE debt," Nordby said.
All five major property sectors, led by apartments and industrial/distribution properties, reported higher values in the mid-year update compared with seven months ago. But industrial values and leasing demand showed the strongest growth as U.S.-based manufacturing continued to recover.
"Demand for industrial space
is directly correlated to GDP growth," Nordby said. "This has been a good thing over the past two years as GDP growth has been fair, and there has been virtually no new construction. Therefore, economic growth has translated into higher occupancies almost across the board."
Respondents said buyers are particularly keen on industrial properties in strong energy and high-tech markets such as Austin and California’s Silicon Valley, where job gains, leasing demand, and rental growth are expected to lead the country.
"Property fundamentals are key and are needed to justify transaction prices," DiRocco noted. "Current CRE investors might be looking at a longer term investment strategy compared to what we've seen in the past."
Among the top10 U.S. markets and selected prime, secondary and tertiary locations, respondents selected Boston as the top investment market to watch, followed by Houston, where year-over-year employment growth was 3.7% compared with the national average of 1.5%. San Jose, Austin and San Francisco also showed big mid-year 2012 gains.
Markets severely damaged in the recession such as Detroit and Phoenix saw values increase 16% and 1.3% over the original report, respectively. Denver, Seattle and New York showed modest increases, while Atlanta, Jacksonville, Las Vegas and San Diego continued to struggle.
The biggest loser in market investment prospects since last fall has been Washington, D.C., with high property prices combined with potential federal government cuts weighing heavily on the sentiments of investors, according to survey participants.