As 2012 approaches a close, industry research suggests that commercial real estate investors are optimistic about the opportunities that will present themselves in 2013.
According to a year-end survey of commercial real estate investors released by PwC on Dec. 19, respondents reported that they expect improved performance across all property sectors despite challenges such as the looming fiscal cliff.
“The commercial real estate industry continues to show its investment durability as assets command attractive spreads over fixed-income investments and offer more stability than stocks,” said Mitch Roschelle, partner and U.S. real estate advisory practice leader with PwC. “Most property sectors continue to post occupancy gains and rental rate growth.”
The report also noted that foreign investors are particularly bullish on commercial real estate in the United States as they look for stable investments during uncertain times.
Lawrence Yun, chief economist with the National Association of Realtors, said the market has been slowly building momentum.
“The economy is expected to grow 2.5 percent next year, and with modest job creation, assuming there is no fiscal cliff, the demand for commercial space will gradually rise,” he said.
Office sector investors are less apprehensive about risk, according to the PwC survey. While they still prefer core, trophy assets, more investors are looking to buy assets in strong secondary markets or non-core properties in primary markets. PwC attributed the trends to both aggressive pricing and improved fundamentals.
Vacancy rates in the office sector are projected to fall from an estimated 16.7 percent in the fourth quarter to 15.7 percent in the fourth quarter of 2013, Yun noted.
Investors are also becoming more comfortable with the retail sector, according to the PwC report, which noted that declining cap rates have extended to the retail sector. Respondents also said yields have compressed too much for well-leased strip shopping centers that some are considering “buying value add in prime locations due to a lack of new supply,” Roschelle said.
NAR is projecting that retail vacancies are expected to ease from 10.8 percent in the fourth quarter to 10.6 percent in the fourth quarter of 2013. However, Roschelle said challenges remain with power centers due to rising Internet retail sales, merchant consolidations and an inability to easily shrink into urban streetscapes.
In the apartment sector, survey participants said they expect that market conditions will continue to favor sellers. However, some investors apparently sense that rents may have peaked and that some markets are now overpriced.
“In addition, investors remain attentive to the near-term impact of new construction,” Roschelle said. “Consequently, this market’s average initial year market rent change rate dipped for the second consecutive quarter, suggesting less upside in this market.”
On the other hand, the NAR said the multifamily sector is projected to see vacancy rates decline slightly from 4.0 percent in the fourth quarter of 2012 to 3.9 percent in the fourth quarter of 2013. That level of demand justifies higher rents, according to NAR.