Investors Dig in for ‘Painfully Slow’ Recovery

NEW YORK CITY-Encouraged by the improved availability of debt and hungry for core assets, investors nonetheless now wonder whether a gradual recovery represents the new normal. So says PricewaterhouseCoopers’ Susan Smith, director of the firm’s real estate advisory practice and editor-in-chief of the quarterly Korpacz Real Estate Survey released Thursday. “It’s even more cemented in their minds this quarter that from an economic and fundamentals standpoint, across all geographies and property sectors, recovery will be painfully slow,” she tells GlobeSt.com.

The upshot of this slow pace, as investors see it, is that “we may be in a new type of operating environment,” Smith says. “A couple of respondents said they’re just trying to figure out how to survive and operate in this new atmosphere. It’s going to be this way for a long time. We may never go back to the kind of pricing and availability of debt we had” at the market’s 2006-2007 peak.

Investors responding to PwC’s quarterly survey have maintained this basic view for some time, but one dramatic change from a year earlier, or even six months ago, has been the resurgence in the credit markets. Some investors surveyed expressed surprise at just how quickly debt availability has rebounded over the past year.

Smith notes that one Washington, DC-based respondent told her would-be lenders were “tripping over themselves” to provide debt for that investor. At the same time, she adds, “underwriting is still tough. Nobody’s giving it away.”

Loan-to-value ratios remain especially stringent for office properties, and Smith says that’s likely to remain a constant for some time as office fundamentals lag the recovery. For apartments, it’s a different story. “Good quality multifamily assets can easily get 70.0% to 75.0% LTVs and even higher (80.0% to 85.0%) using GSEs, like Fannie Mae and Freddie Mac,” according to one investor quoted in the survey.

Both debt and equity continue to favor core assets, which remain in supply as short as demand is long. “While some investors are venturing into more opportunistic buys, that’s really not the norm,” says Smith.

The stampede after a handful of core-quality properties is helping drive capitalization rates down and prices up, Smith says. While some investors call this a “mini-bubble,” others chalk it up simply to the law of supply and demand.

“Once there’s more proof of the market recovering and that the depth of the recovery is really there, it’ll probably kind of fade away and balance out,” says Smith. Until then, she adds, investors are struggling with the question of whether the recovery and the appetite for real estate investment have “legs,” to use a term favored by some respondents. “Is it all a temporary blip, or are we really on the verge of something here? Some investors don’t buy it. They don’t see enough job growth and they don’t see what’s happening right now as sustainable.”

The flip side of that skepticism is that it anticipates buying opportunities down the road via “more pain to come” as the industry continues to deleverage. “Extend-and-pretend with all of these loans has helped, but many investors wonder if the banks have just been pushing off the inevitable,” Smith says. “If we do see the economy pick up, if we do have job growth and this spills over into leasing and consumer activity, then maybe we can have the economic rebound push ahead of the banks’ problems. But it’s a close race.”