"Investors feel that they've turned the corner and they can see the light at the end of the tunnel—it's just that the tunnel is very long," says Smith, director of PwC's real estate advisory practice and editor of the survey. "It'll take a while to reach that light, but at least they can see it." The pessimistic tone of voice that Smith heard when conducting interviews for the fourth quarter 2009 survey is "gone" now.

As an illustration of investors' greater optimism—as well as one of the reasons for that positive attitude—respondents in 19 of the 30 markets say they expect cap rates to hold steady for the next six months. In the survey for Q4 '09, just two markets offered such a forecast; previously, the cap rates had been on the rise.

Smith says investors are realizing that the economy has been showing signs of improvement. "You can see that in some of the recent jobs numbers and retail sales figures," she says. "Some of the residential markets have really bottomed in terms of price declines and value declines. All of that is finally trickling through the commercial real estate investors."

She adds that compared to prior quarters during the downturn, Smith says, "there's more of a sense that buyers, sellers and investors are in agreement on pricing." That bodes well for an improvement in selling activity during 2010, even though survey respondents still expect it to be a relatively slow year.

"Investors feel that right now is a great time to buy," Smith says. Even if property values decline a little more over the next year due to weak fundamentals, "the declines will not be as steep as they were at the start of the correction." And for survey respondents, there's more of a sense that "if they can't meet their upcoming debt maturities, maybe an alternative for them is to sell, take their loss and move on, sensing that the bottom is near. Even if they have a little bit of a loss, taking the equity they have and purchasing an asset now at a comparatively low price presents a great opportunity for them."

Although competition for quality deals is "pretty tough," as one survey participant put it, PwC says most participants believe that underwriting assumptions are "appropriately cautious" and "pricing issues between buyers and sellers are easing." According to PwC's Q1 report accompanying the survey, "Market pricing that is better understood among investors and lenders will allow the credit markets to continue to thaw and deal with the rising level of CMBS delinquencies and mortgage defaults."

These looming delinquencies and defaults, survey respondents believe, will spur an increasing number of forced sales over the next two years, even if the expected glut of underwater properties has yet to reach the marketplace. One survey respondent put it this way: "A day of reckoning is likely coming for many industry players."

Instant Insights /

Investors' Outlook Turns Positive in Q1

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