Commercial real estate investors and professionals have lowered their performance expectations, anticipating high single-digit returns for ‘core properties’ and mid-teen returns for higher-risk investments, according to the Emerging Trends in Real Estate 2011 report, released this week by PricewaterhouseCoopers (PwC) US and the Urban Land Institute.
The survey finds that lenders with strengthening balance sheets will step up foreclosure activity and dispositions of properties during 2011 and 2012, helping values reset between 30% and 40% below 2007 peaks.
Mitch Roschelle, leader of PwC's U.S. real estate advisory practice, says the market is predicting ‘extreme bifurcation’ -Â a widening gap between the ‘trophy and less desirable assets.’
‘Well-located and well-tenanted properties that can generate strong cashflow over the next several years are exactly what buyers and lenders want, according to survey respondents,’ Roschelle says. ‘As a result, prime apartments and office buildings in gateway cities are generating the most attention from the increasing pent-up sidelined capital.’
The report indicates that debt markets will thaw further next year as banks continue to strengthen their balance sheets, take their losses and step up lending, resulting in higher transaction volumes. Borrowers are expected to have improved chances to obtain refinancing if they own relatively well-leased cashflowing properties.
Overleveraged owners dealing with high vacancies and rolling down rents, on the other hand, may face more uncertain prospects in the credit markets, including the increasing likelihood of foreclosure.
Survey participants believe the 24-hour cities will always dominate and outshine secondary markets. Washington, D.C.; San Francisco; Boston; and Seattle are seen as the preeminent gateway cities. Houston and Denver solidify rankings, and respondents show faith in South California's resiliency, despite recent setbacks.
While ratings improved for markets from coast to coast over 2010's results, the gap between top and bottom continues to widen, and more than 60% of surveyed cities still fall below ‘fair’ ratings for commercial and multifamily investment prospects, PwC and the Urban Land Institute say.
Among property sectors, the survey finds that apartments outrank all other sectors – favorable demographics and the housing bust should increase renter demand, and some interviewees forecast rent spikes by 2012 in some infill markets where development activity has ground to a halt. Readily available financing from Fannie Mae and Freddie Mac bolsters buying activity, respondents add.
Core players also like warehouses and infill grocery-anchored retail properties, while full-service center city hotels remain the top choice for opportunity investors.
SOURCE: Urban Land Institute