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Confidence Is Rising Across Real Estate Sector
NEW YORK -- Continuing good economic news and signs of increased activity among companies looking to add new space are helping to convince real estate investors that better days are ahead, according to the PricewaterhouseCoopers second quarter 2004 Korpacz Real Estate Investor Survey released yesterday."While soft market conditions are likely to linger for the remainder of 2004 and into 2005, it is apparent that real estate investors have become more optimistic now that the worst seems to be behind us," said Peter Korpacz, director of PricewaterhouseCoopers' Global Strategic Real Estate Research Practice. "Nevertheless, many markets remain saturated with available space -- thereby offering tremendous opportunities for tenants looking to either upgrade their space or relocate."While there has been a recent upswing in "space shopping" by tenants in a number of markets, there appears to be no great urgency to lock into specific deals -- a situation that keeps rental rate growth to a minimum and encourages tenants to continue to ask for and receive favorable concession packages. "Until companies become less hesitant about taking space and moving forward, market conditions will continue to provide tenants with the upper hand during lease negotiations," the report notes.But when it comes to sales transactions, landlords and existing owners should enjoy a decided upper hand, especially for transactions involving stable assets.Thanks to a lack of alternative investment options and pent-up demand from nonleveraged buyers, the amount of capital targeting commercial real estate is huge, with prices for the best assets remaining "unbelievably aggressive," the report finds."Even in markets where severe supply-demand imbalances are likely to keep a full recovery from happening in a timely manner, such as Boston and San Francisco, properties that offer limited near-term lease expirations, credit tenants, and stability are on the receiving end of hefty prices," says the report.Faced with extremely aggressive bidding competition for the top assets, a number of investors are turning to so-called distressed properties -- typically assets with either current or near-term risks attached to them, such as large amounts of vacant space, upcoming lease expirations, and/or tenants with low-rated credit. But even these properties are being priced aggressively by sellers who have taken note of the strong demand for real estate, says the report, and it may take a rise in interest rates to bring about some much-needed relief for investors.Key Property Market and Geographic PreferencesThe national regional mall market remains very strong, especially for well-leased centers that dominate trade areas in which there is little opportunity for new competition. Cap rates are expected to remain low, and could even decline more over the near-term, thanks to the high demand for real estate and the continuing strong performance of the retail sector.Investment demand in the national power center market also remains extremely strong, as many big-box retailers continue to post impressive year-over-year retail sales gains. With very little quality product available for sale, competition for the best assets remains intense, thus keeping prices at a premium. Likewise, investment demand for well-leased, well-located strip shopping centers continues strong, and sales prices continue to rise.The national Central Business District office market shows somewhat mixed results, with many downtown markets across the country still dealing with rising vacancy rates and mediocre leasing activity while others reporting a noticeable improvement in tenant demand. The downtown markets that experienced the greatest overall declines in vacancy rates from the first quarter of 2003 to the first quarter of 2004 were Bellevue, Wash. (25.3% to 20.9%), Orange County, Fla. (20.1% to 16.1%), Palm Beach, Fla. (14.7% to 11.0%), Phoenix (19.8% to 16.7%) and New Haven, Conn. (20.2% to 17.6%). Conversely, the downtown markets that saw the greatest increases in vacancy rates year-over-year were Houston (19.5% to 24.0%), St. Louis (22.9% to 26.6%), Denver (18.5% to 20.5%), Atlanta (17.3% to 18.8%), and Hartford (21.5% to 22.9%). Nationally, the average CBD vacancy rate went from 15.3% to 15.2% during the same period.Likewise, the national suburban office market offers both good and bad news, with markets such as Miami, New York's Westchester County, Atlanta and portions of the Philadelphia suburbs showing improvement, while Seattle, Dallas and Boston continue to deal with large amounts of vacant space, a lack of demand and insufficient job growth. Overall, the number of suburban markets reporting declines in overall vacancy rate overshadowed those reporting increases. Much of the positive movement can be traced to increased leasing activity, as well as a dramatic slowdown in speculative construction in many suburban markets, the report said.The national warehouse market continues to experience an increase in available space, but more and more investors and landlords are expressing confidence that improvements in U.S. inventory levels and in production of goods will soon lead to greater demand for industrial space. While the recent recession and slow-moving economic recovery have impacted all warehouse markets, those linked to seaports and international trade (e.g., Atlanta, Miami, Northern New Jersey and Los Angeles) have fared better. The report listed the top five warehouse markets as Los Angeles, Long Island, Riverside, Westchester, and Orange County and Albuquerque (tied for fifth). The bottom five markets were identified as Raleigh, Pittsburgh, Austin, San Jose and Atlanta.In the national apartment market, transaction activity remains very healthy even though vacancy rates continue to inch up in many markets across the country. And while some investors have taken to acquiring properties in the nation's "internal" markets such as Phoenix and Dallas, the greatest demand is for properties in markets along the East and West Coasts, especially southern California. Furthermore, ongoing positive demographic trends such as increasing levels of immigration, rising numbers of single-person households, and aging echo boomers should keep demand for rental housing strong.The national golf market appears to be coming off a recent downward slide and seems poised for a rebound, thanks in part to the industry's housecleaning efforts, a dramatic reduction in new construction and an improving national economy. Most experts anticipate the favorable trend to continue throughout 2004 and into 2005, although it will be mitigated somewhat by the challenge of increasing the number of golfers.The market for new development is likely to continue to lag, as much of the real estate industry continues to deal with serious over-supply issues (the single-family residential and retail being the major exceptions). In the office sector, lackluster job growth continues to hinder demand for new office space. In the apartment market, continuous additions to existing supply and a slow-moving economy are hurting the underlying fundamentals while continued low interest rates have enabled many would-be apartment renters to become homeowners.And while some developers express optimism that "the worst is over," until the national economy shows more impressive signs of improvement, development land opportunities will tend to be very limited.PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services for public and private clients.Visit PricewaterhouseCoopers: www.pwc.com "