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NEW YORK CITY-Commercial property owners surveyed by PricewaterhouseCoopers are not waxing enthusiastic about the hand the downturn has dealt them. “As frightening as it seems, the worst is not behind us,” the quarterly Korpacz Real Estate Investor Survey quotes one participant. “We will feel more pain before we hit bottom and start to recover,” says another. With that zeitgeist as the backdrop, the response of a third participant sums up the report’s basic finding: “We are more in survival mode than in acquisition mode.”

Increasingly, investors are looking to protect the value of their existing properties “in order to compete and survive in an increasingly challenging environment,” according to PWC, which issued the survey on Tuesday. Real estate investors don’t anticipate a rebound in any sector until well into 2010, the survey states. Meanwhile, “property owners are faced with limited financing options, declining tenant demand, rising overall capitalization rates and deflated confidence,” according to the survey.

“Tenants are in the driver’s seat, and landlords are in survival mode, trying to preserve revenue streams in one of the harshest ownership environments ever encountered,” says Tim Conlon, partner and US real estate sector leader for PWC, in a release. “It will be survival of the fittest going forward, with owners who are able to remain financially strong being better positioned to capitalize on the buying opportunities that are to come.”

In the face of rising vacancy rates across many US office markets, landlords are being more proactive about signing tenants to new leases, expansions and renewals, sometimes offering leasing incentives and lower rental rates, the survey states. In addition, “some are attempting to cut property costs and better position assets in a rapidly growing tenants’ market.”

PWC’s quarterly real estate report, which features the survey results, also includes snapshots of commercial property sectors along with 18 office markets. The report notes that demand for office space has softened generally, with rising vacancies in traditionally strong markets including Manhattan.

“As supply outpaces demand, the average initial-year market rent change rate remains on a downward trend in the office sector, dropping roughly 260 basis points over the past year in the surveyed office markets,” according to the report. “Furthermore, property values are expected to drop as much as 30% nationally over the next year in the CBD and suburban office markets.”

An article on the retail sector, prepared for PWC by Cushman & Wakefield, finds an even more dismal landscape. “Sale transactions have nearly come to a standstill in the national regional mall market, with investors wary of performance and having trouble pricing assets,” the report says. “The average initial-year market rent change assumption dipped to 1.71% this quarter, 92 basis points lower than a year ago and the lowest average ever reported for this market.”

Power center owners are also navigating stormy seas, according to PWC. They’re having difficulty maintaining occupancy levels and rental rates as retail sales decline.

Cap rates rose across all sectors by 41 basis points to 7.98% in the previous quarter, marking the second straight quarterly increase of at least 40 basis points. Among the markets surveyed by PWC, only Houston and Washington, DC have not seen cap rates rise. Most of the respondents to the Korpacz survey expect overall cap rates to increase over the next six months.

Although sales volume has been low, respondents to the Korpacz anticipate that buying opportunities will emerge in the coming months as commercial loan defaults increase and the number of distressed assets on the market increases. In fact, some are preparing for potential acquisitions by boosting their liquidity through de-leveraging, joint venture partnerships and selectively disposing of current holdings, according to PWC.

“Taking advantage of troubled-asset sales, however, will be quite challenging for many buyers,” according to PWC’s quarterly report. “First, the bid-ask pricing gap remains very wide between buyers and sellers. Second, ascertaining where prices lie remains very diffi¬cult due to a decline in sales activity. Third, financing options remain scarce. And lastly, and probably most importantly, the confidence and trust exuded by investors during the recent expansion has been lost and will take some time to be found again.”

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