PwC: Rotten Fundamentals Aside, RE's Still the Best Bet

Peter Korpacz, director of global strategic real estate research for PwC, tells GlobeSt.com that '03 is building on last year's strong investment activity, a year in which "$93.5 billion worth of office industrial retail and apartment properties sold," he says. "That represented an 18%increase over 2001. "With few alternative hedges against risk, investors are still willing to pay a premium for the relative safety of quality real estate," says Korpacz,. "However, if occupancy rates and rents remain sluggish, or continue to worsen and interest rates rise, prices could drop precipitously."

Korpacz reports that capital shifted in Q1 into the retail and office sectors, and there was a particular emphasis on shopping centers and malls. CBDs were the prime investment draw, outstripping suburban assets, and, according to Korpacz, trophy assets dominated.

Geographically, the Midwest and the West Coast saw the most investment activity, with Midwest acquisitions jumping by 40%--or $3.5 billion--over the same period in '02, and the West enjoyed a 33% increase, representing some $6 billion over '02. California alone accounted for 60% of all West Coast acquisitions.

Following is a breakdown of the investment activity for various cities around the nation:

Atlanta. Continues to slump, with demand lagging far behind supply.

Boston. Continues to be mired in one of the most severe market contractions ever recorded.

Chicago. Investment activity involving high-quality assets remains robust.

Dallas. Remains one of the weakest in the country with astoundingly high vacancy rates and low absorption rates.

Houston. Continued deterioration.

Los Angeles. Brisk investment activity suggests that market conditions will improve by the end of 2003.

Manhattan. The longevity of the office market continues to entice investors, despite the fact that vacancy rates remain on an upward trend, large volumes of shadow space threaten to postpone the recovery and increases in both property taxes and insurance continue to burden building owners.

Philadelphia. A flurry of leasing activity at the end of last year has many investors upbeat about this market's future. It continues to maintain relatively stable fundamentals.

San Francisco. The amount of available space in the office market shows little sign of declining anytime soon. The problem is due largely to the continuous return of sublease space from downsizing companies and a lack of demand. The addition of three new office buildings is also a factor.