(Read more on the debt and equity markets.)

NEW YORK CITY-While many are reporting a rumored meltdown in the nation's housing market, underlying fundamentals remain relatively strong across most sectors of the commercial real estate industry, according to a recently released PricewaterhouseCoopers 3Q '07 Korpacz Real Estate Investor Survey. “There's no question there has been some negative impact as a result of the problems arising from the subprime residential market downturn,” notes Tim Conlon, PricewaterhouseCoopers' US Real Estate Sector Leader, in the report. “That said, while the volume of investment levels has slowed, the gloom-and-doom scenarios predicted for the commercial real estate market have yet to materialize and the underlying fundamentals continue to be fairly strong.”

Conlon explains to GlobeSt.com that respondents to the survey said that “they have noticed that the tightening of the credit markets has had a broader impact on the economy as a whole, most apparently in the residential sector, but gradually moving over to the commercial side as well. As a result, highly leveraged investors are finding it harder to make deals, compared to all-cash and low-leveraged buyers, because they need to come up with a higher proportion of equity. That, in turn is extending the amount of time it takes to do deals.”

Notable findings in the survey include: investment demand for CBD office assets should remain strong, especially for class A properties located in major US coastal cities, such as New York, San Francisco, Seattle and Washington, DC; “condo reversion” activity–properties previously converted to condos, which are now returned to the rental market–is undermining the health of the apartment market in a number of regions; transactions involving strip shopping centers have been quite voluminous during the past few months, mainly due to an increase in corporate mergers and acquisitions. Including privatizations, more than 1,600 strip centers traded for $5 million or more during the first six months of 2007.

Conlon tells GlobeSt.com that the gloom-and-doom scenarios mentioned above were the referring to the “dire warnings that appeared in the newspapers and nightly newscasts, where concerns were expressed about how far the problems in the credit markets would extend and whether or not the sky was falling.” He noted an example of a recent headline, 'Speculators Bet Housing Prices to Fall Another 10%, Increasing Odds of US Recession,' noting that respondents to the 3Q survey seem to believe that the era of “easy money” is probably over, but also that underlying fundamentals for the commercial real estate industry as a whole remain strong.

“On the bright side is the recent decline in the federal fund rate, as well as continued job growth in the service-producing employment sector–plus 60,000 in August,” Conlon tells GlobeSt.com. “So while 'doom-and-gloom' scenarios may make eye-catching headlines, those kinds of predictions are probably premature based on the limited data we have right now.”

In the retail sector, the report noted that despite apparently solid interest from would-be investors, a lack of quality offerings is limiting acquisition activity in the national regional mall market, as many of the best-performing regional malls are owned by top public owners and are rarely traded. Those that do come up for sale are quickly and aggressively acquired. At the same time, lifestyle centers are increasingly sought after by investors, with the transformation of existing regional malls into lifestyle centers and/or mixed-use properties being seen as ongoing trends. Investors also are showing strong interest in national power center assets as numerous big-box and discount retailers continue to perform well–despite a slowdown in consumer spending caused by higher interest rates, eroding credit quality and larger levels of consumer debt. A number of investors, in fact, are looking toward new construction as an alternative to acquiring existing power center assets. In the national strip shopping center market, the pace of transactions has been steady due to ongoing M&A activity, although a slowdown in single-asset sales activity is thought to be more the result of higher prices than a lack of investor interest.

According to the report, in the office sector, so far, a less than robust showing in the nation's employment growth rate has not led to any slowdown in the national CBD office market. Limited additions to supply, along with fairly steady increases in office-based employment have enabled the national CBD office market to continue to tighten. As a result, investors continue to show strong interest, especially for assets located in major cities along the East and West coasts of the US.

In the flex/R&D, the report explains that investors in the national market are seeing added interest from would-be suburban office tenants searching for competitive alternatives in the face of tighter vacancy rates and rising rents in the national suburban office market. In fact, in many West Coast suburbs, such as San Diego and Orange County, vacancy rates for flex/R&D are lower than traditional office vacancy rates. For example, in San Diego, flex/R&D space posted a vacancy rate of 8.9% in the Q2 '07, compared to a rate of 10.9% for the office sector.

For the warehouse sector, despite demonstrating some initial weakness at the start of this year, underlying fundamentals for the national warehouse market are again showing strength. Dominant warehouse markets continue to line both the East and West coasts and include Los Angeles, San Diego, Miami, Tampa, FL and Northern New Jersey. Vacancy rates for these top-performing markets range in the low single-digit range and present challenges to existing and prospective large-space users. Healthy fundamentals across much of the national warehouse market continue to lure investors who like the steady returns and appreciation rates typically offered by this sector.

As far as the apartment sector is concerned, the report found that an increase in apartment vacancy rates nationally is expected to hinder rental growth in many individual markets through the end of 2007. “Condo reversion” activity is providing a steady increase in supply in a number of markets. Markets with the highest level of condo reversion activity include Phoenix, Baltimore, Orlando, and the Washington, DC/Northern Virginia suburbs. At the same time, some rental growth potential is perceived in certain technology-driven markets, such as Northern California and Seattle.

Instant Insights /

Healthy Fundamentals Cushion Investors' Concerns

Related Stories

Recommended For You