Korpacz Real Estate Investor Survey

4th Annual Meadowlands Conference
Investment-Grade Commercial Real Estate:
Trends & Expectations
May 19, 2010
Susan M. Smith, MAI
Director
Asset Management Practice
*connectedthinking
PwC
Section
I
PricewaterhouseCoopers
Korpacz Real Estate Investor Survey®
~ Separating Facts from Myths ~
Section I – Separating Facts from Myths: Korpacz Real Estate Investor Survey®
•
Quarterly investor Survey of major buyers
and sellers who focus on U.S.
institutional-grade commercial real estate.
•
Now in its 23rd year of production, the
Survey reports on trends for over 30
national and regional markets.
•
The Survey also contains information on
national specialty markets.
•
Each issue is compiled after surveying
over 120 investor participants by using
on-line questionnaires and completing
telephone interviews.
•
Survey content reflects investors’
expectations.
•
Survey findings do not necessarily reflect
the views of PricewaterhouseCoopers.
•
Survey is released 4 times a year.
Slide 3
Section
II
U.S. Commercial Real Estate (CRE)
Fundamentals ~ Through the Eyes of
Surveyed Investors
Section II – CRE: Through the Eyes of Surveyed Investors
Overall for the United States…
•
Investor sentiment regarding CRE fundamentals, as well as the future
performance of the economy and financial markets, greatly improved
following the start of the new year.
•
Economic numbers, such as job growth and GDP growth, are giving owners
a bit of confidence in each of the four main property sectors (office,
industrial, retail, and apartment) .
•
Intertwined in investors’ uplifting observations is the realization that
challenges and concerns still exist.
•
Still, the majority of surveyed investors find it easier to sense a recovery now
than at any other point during 2009.
•
Optimism truly exists among Survey participants.
Slide 5
Section II – CRE: Through the Eyes of Surveyed Investors
Survey Investor Quotes: 1Q10 and 2Q10…
“On the lending side, there seems to be more willingness to get money out.”
“We very much sense that the bottom is near, if not here, for better-positioned
markets.”
“Owners are becoming more realistic with their expectations and are pursuing
survival strategies.”
“Pricing issues between buyers and sellers are easing.”
“Many markets are rapidly revaluing assets.”
“Industry is highly bifurcated between superior assets and everything else.”
“The economic lag effect is still hurting fundamentals and will produce a slowmoving CRE recovery.”
Slide 6
The Economy – “Remains a Big Hurt”
“Statistical” recovery mired by
overleveraged consumers, investors,
households, and government
Two decades of “fake” job growth
and prosperity based on excessive
borrowing
America’s standard of living peaks –
wages sputter, worker benefits
decline, and pensions get slashed
“The recovery will be painfully slow.”
Source: Emerging Trends in Real Estate 2010 and Korpacz Real Estate Investor Survey
Section II – CRE: Through the Eyes of Surveyed Investors
Office Sector…
•
Significant job losses in office-space-using employment sectors hinder
demand for new space.
•
Tighter corporate budgets remain a drag on office-space demand.
•
The overall vacancy rate for the U.S. CBD (central business district)
market increased to 15.03% in the first quarter of 2010, as per Cushman
& Wakefield.
•
More property tours are being reported, which is a step in the right
direction.
•
For the U.S. suburban office market, overall vacancy was 19.37% in the
first quarter of 2010, according to Cushman & Wakefield.
Slide 8
U.S. Employment Trends
The U.S. economy lost nearly 8.0 million jobs during the “Great Recession.”
Labor market is gradually recovering, but it will take many months to undo the damage.
Source: Bureau of Labor Statistics
“The worst may be behind us, but it is going to be
a real slow recovery process.”
U.S. Initial Jobless Claims
Initial jobless claims have been gradually easing since peaking in early 2009.
NY was 1 of 2 states that recently reported an increase in claims of more than 1,000.
Source: Bureau of Labor Statistics
* Initial jobless claims spiked in late 2005 following Hurricane Katrina.
Section II – CRE: Through the Eyes of Surveyed Investors
Surveyed investors would not be surprised to see overall vacancy
increase a bit more through 2010 before stabilizing/retreating.
Source: Cushman & Wakefield
“Renewal activity is steady, but most tenants are
making do with existing space.”
Section II – CRE: Through the Eyes of Surveyed Investors
Overall vacancy remained relatively unchanged near 20.0% in the
first quarter of 2010.
Source: Cushman & Wakefield
Section II – CRE: Through the Eyes of Surveyed Investors
Industrial Sector…
•
Weak demand and untimely additions to supply continue to present
challenges to this sector.
•
Overall vacancy continues to increase, reaching 14.0% in the first quarter
of 2010, as per CBRE Torto Wheaton Research.
•
Quarterly increases in vacancy are not as steep.
•
Large industrial hubs are also struggling; such as Atlanta and Dallas.
•
Inland hubs are struggling the most: Phoenix (19.8%), Memphis (19.3%),
and Columbus (16.0%).
•
Lower vacancy rates are noted for Los Angeles (8.1%) and Long Island
(10.4%).
Slide 13
Section II – CRE: Through the Eyes of Surveyed Investors
Steady completions and less consumption are leading causes of
higher overall vacancy rates in the national industrial market.
U.S. Industrial Market
Source: CB Richard Ellis
Section II – CRE: Through the Eyes of Surveyed Investors
Retail Sector…
•
Very bifurcated with trophy assets doing well and vacancy/leasing issues
plaguing most others.
•
Empty big-box spaces are both a burden and an opportunity.
•
Grocery-anchored centers are still “little darlings” but leasing challenges
and concerns exist, particularly for mom-and-pop shops.
•
Overall vacancy sat just below 11.0% in the first quarter of 2010 as
fundamentals eroded but at a slower pace, as per Reis.
•
Restrained consumer spending is still a drag on the retail sector and its
recovery.
Slide 15
Section II – CRE: Through the Eyes of Surveyed Investors
Lofty vacancy rates continue to put downward pressure on rental
rates at retail properties.
Source: Reis
Retailers Continue To Struggle
Shoppers head back to the store starting in Fall 2009, but spending has been choppy.
The end of job losses has been a strong plus for this sector.
Source: Bank of Tokyo-Mitsubishi UFJ
“Top-tier fortress malls handled the downturn better than
most other retail formats.”
Consumer Confidence Remains Low
Consumers’ short-term outlook has been unpredictable for about the past year.
After declining a bit in February, two months of increases have been posted.
111.9
Consumer Confidence Index
57.9
25.3
Source: The Confidence Board
The Consumer Confidence Index averaged 106 in 2006 and 103 in
2007. In 2008, it averaged 58 and in 2009 it averaged 45.
Section II – CRE: Through the Eyes of Surveyed Investors
Apartments…
•
The rental pool remains constrained by the job market, which is just starting
to show improvement.
•
This sector will “bump along the bottom” for a while.
•
Tenants have more rental options to choose from, causing many apartment
managers to offer free rent and/or lower rental rates.
•
Free rent for 2Q10 ranges up to 6 months on a one-year lease; the average
free rent concession is just below 2 months.
•
Underwriting assumptions are less conservative for the Pacific region
apartment market.
•
The apartment sector will lead the recovery.
Slide 19
Section II – CRE: Through the Eyes of Surveyed Investors
A high number of completions in 2009 kept the apartment sector
from gaining much momentum, but vacancy stabilized.
U.S. Apartment Market
Source: Reis
Section
III
PricewaterhouseCoopers
Korpacz Real Estate Investor Survey®
~ Key Findings ~
Section III – Key Findings: Korpacz Real Estate Investor Survey
Key Findings…
•
The hopefulness conveyed by investors is illustrated in the Survey's
quarterly overall capitalization (cap) rates, which have started to stabilize
and even dip for quality assets and in certain markets.
•
At the peak of the cycle in mid-2007, the aggregate average overall cap rate
in the Survey was 6.87%. Two years into the recession, the average
reached 8.36% (up roughly 150 basis points).
•
In 4Q09, it ticked up a mere ten basis points to 8.49%. This quarter, it
actually dipped seven basis points to 8.42%. For 2Q10, it moved up again
(slightly) to 8.61%.
•
Overall cap rate shifts are not uniform: 17 markets down, 10 markets up,
and 3 unchanged.
Slide 22
Survey KDI – Aggregate Average OAR
Overall capitalization rates (cap rates) continue to adjust themselves.
“Glut of core capital is causing rapid cap rate compression for best properties.”
Section III – Key Findings: Korpacz Real Estate Investor Survey
Overall cap rates have trended upward in all three Surveyed retail
markets, but remain well below historical highs.
For 2Q10: Regional mall down 41 bpts.; strip center down 11 bpts.; power center up 15 bpts.
Slide 24
Section III – Key Findings: Korpacz Real Estate Investor Survey
Same can be said for the Survey’s two office markets.
For 2Q10: CBD office down 20 bpts.; suburban office down 19 bpts.
Slide 25
Section III – Key Findings: Korpacz Real Estate Investor Survey
In the Survey’s industrial markets, average overall cap rates have
increased almost to historical levels.
For 2Q10: Warehouse down 13 bpts.; flex/R&D up 2 bpts.
Slide 26
Section III – Key Findings: Korpacz Real Estate Investor Survey
Overall cap rates for the Survey’s 18 individual office markets
reflect mixed performances with Manhattan and Washington, DC
continuing to post the lowest average OARs.
Source: Korpacz Real Estate Investor Survey; Second Quarter 2010
Slide 27
Source: Cushman & Wakefield
Section II – Key Findings: Korpacz Real Estate Investor Survey
Key Findings continued…
• A prevailing tenants’ market still exists, according to surveyed
investors.
• Rental rates have declined across all geographies and
property types.
• Since mid-2007, underwriting assumptions relating to market
rent growth have declined an average of 445 basis points in
the Survey’s 18 individual office markets.
• Largest drop since the peak of the cycle has been in the
Manhattan office market.
• A few markets, such as Los Angeles and Northern Virginia,
have shown improvement over the past year.
Slide 28
Growth Rate Assumptions Drop
Expectations for rent growth evaporated following the recession.
This key assumption averaged 3.87% in 2Q07; averaged -0.58% for 2Q10.
Source: Korpacz Real Estate Investor Survey; Second Quarter 2010
Section III – Key Findings: Korpacz Real Estate Investor Survey
Surveyed investors are still being conservative with market rent
growth rate expectations, but figures are slowly rebounding.
Source: Korpacz Real Estate Investor Survey; Second Quarter 2010
Slide 30
Section
IV
PricewaterhouseCoopers
Korpacz Real Estate Investor Survey®
~ Expectations ~
Section IV – Expectations: Korpacz Real Estate Investor Survey
(Great) Expectations…
• Investor sentiment appears just as hopeful for the near term.
• While fundamentals are expected to deteriorate a bit more
through 2010, a bottom is materializing.
• Buyers and sellers will continue to work to close the bid-ask
pricing gap.
• Further distress will push more properties to market.
• Assessment management and value preservation remain
priorities for property owners.
Slide 32
Section IV – Expectations: Korpacz Real Estate Investor Survey
More (Great) Expectations…
•
Over the next six months, the majority of Survey participants
expect overall cap rates to "hold steady" in 20 of the Survey's
30 markets.
• It remains a great time to buy.
• Few investors are focusing on new construction; “still a limited
play.”
• Medical office building ownership is growing in popularity.
Slide 33
Section IV – Expectations: Korpacz Real Estate Investor Survey
So when will the commercial real estate industry
recover…
• An industry-wide recovery is not expected until
2012.
• The pace of the recovery will vary for each property
sector, as well as across individual geographies.
• The multifamily sector will lead the recovery, while
the retail sector will lag behind.
Slide 34
Section IV – Expectations: Korpacz Real Estate Investor Survey
Office Sector Recovery…
Slide 35
Section IV – Expectations: Korpacz Real Estate Investor Survey
Industrial Sector Recovery…
Slide 36
Section IV – Expectations: Korpacz Real Estate Investor Survey
Retail Sector Recovery…
Slide 37
Section IV – Expectations: Korpacz Real Estate Investor Survey
Multifamily Sector Recovery…
Slide 38
In Conclusion…
The recent quarterly findings of the Korpacz Real Estate Investor Survey®
continue to reveal a challenging, yet improving, industry.
The recovery of the CRE industry is, of course, dependant on the recovery
path of the slow-moving U.S. economy.
Debt markets still have some unraveling to do, which could present significant
buying opportunities for the next several months.
Commercial real estate will remain a viable investment option; “its not going
away anytime soon.”
“The strong and smart will survive.”
Slide 39
Thank you.
Susan Smith
631-653-4145
[email protected]
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