Worse in store for US commercial property

Source : Business Times - 19 Mar 2009

The US commercial real estate market is bad and investors expect it to get a whole lot worse, according to a closely followed survey by PricewaterhouseCoopers.

‘As investors painfully watch the value of their assets decline, many feel troubled knowing that the ills of the US economic recession have yet to fully impact the commercial real estate industry,’ starts the first- quarter Korpacz Real Estate Investor Survey of more than 100 investors from real estate investment trusts, pension funds, private equity firms and insurance and mortgage firms.

Many investors are struggling with ways to preserve the value of their investments and maintain ownership in the wake of restricted debt sources, declining tenant demand, and falling values, the survey said.

Investors do not expect the commercial real estate sector to rebound until well into 2010 at the earliest.

‘Investors are not expecting this recovery, when it does happen, to be a sharp recovery where it hits bottom and bounces up,’ said Susan Smith, a director at PricewaterhouseCoopers in the real estate group and the survey’s editor. ‘It’s going to be a very slow sluggish recovery,’ she said. ‘There are just too many things right now that are impacting the industry to make investors very confident about what’s going on,’ she said.

Some property owners are lowering rental rates and increasing concessions, which results in lower revenue.

Compared to a year ago, the average amount of free rent landlords are offering has increased to six month in several major office markets, such as Boston, where it rose from 2.15 months; Manhattan, where it grew from 41/2 months and San Francisco, where it rose from 31/2 months.

One investor in the survey suggested ‘making the best deal you can today because tomorrow’s deal will be worse.’ Investors believe that the overall cap rates, or returns, for US commercial real estate over the next six months will rise by an average 0.47 percentage points from 7.49 per cent in the first quarter 2009, the survey said. When cap rates rise, prices fall.

In the retail real estate arena of malls and shopping centres, investors expect power centres, home of the big box stores, to lose value by the greatest amount, with cap rates rising by an average of 0.744 percentage points from 7.63 per cent, according to the survey. They see cap rates for regional malls rising 0.65 percentage points.

Investors expect rent and occupancy for retail properties to continue to decline in 2009, the survey said. Last year, store closings rose 50.1 per cent to 6,913 and forecasts call for more than 8,000 store closings in 2009, according to the survey.

Most investors said they expect the eroding fundamentals to press values down by 10 per cent to 26 per cent from the 2007 peak, with the most pessimistic investors seeing declines of about 40 per cent, the survey said.