Investors expect positive trends to continue in the commercial real estate industry for the rest of 2014 despite anticipating rising interest rates, according to consulting firm PwC.
A PwC survey of real estate investors in the second quarter of 2014 noted that respondents expressed confidence that the industry would handle anticipated increases in interest rates without serious disruption to its recovery.
At the same time, competition among buyers is likely to remain strong and keep prices for the best properties elevated, the PwC survey said.
Cap Rates Fall in 27 Markets Surveyed
A key finding of the PwC survey was that overall capitalization rates fell in 27 of the 34 markets surveyed by PwC. The steepest decline, 51 basis points, was recorded in the Los Angeles office market.
Mitch Roschelle, partner with PwC and leader of the firm's United States real estate advisory practice, said the high number of markets where cap rates fell “tells me that the real estate asset class, and the recovery that it’s in the midst of is durable.”
“Investors, foreign and domestic, are coming to realize that durable, cash-flowing asset classes like real estate are probably the best long-term investment to have, and when opportunities come along to buy it, they do,” he said.
Most participants in the PwC survey expect cap rates to hold steady during the next six months. Roschelle said he believes the forecast reflects “controlled optimism” on the part of investors.
“Sentiment is very, very optimistic in terms of the continued recovery of the real estate asset class, driven by a slow recovery of the economy,” he said. Roschelle added that he anticipates that the low cap rate environment in real estate will persist “for quite some time.”
Office Sector Expected to See Rising Demand
The PwC survey reported a rise in demand for space within the office sector as a result of steady improvement in employment growth during the past 12 months. At the same time, the number of new workers is helping to offset the more efficient use of space.
In the retail sector, although tenant demand remains sluggish, new supply is limited. As the pace of improvement accelerates in 2015 and 2016, the number of markets in the recovery and expansion phases will increase, according to the survey.
Meanwhile, the survey pointed to a dilemma in the industrial sector: Stronger economic growth and rising demand from online fulfillment centers has boosted demand, yet the ongoing recovery could result in new supply and a contraction in certain markets by 2017.
In the multifamily sector, the rise of new supply in the next 18 months may result in higher vacancy rates and limited rent growth, according to the survey. Consequently, as many as 30 individual multifamily markets could move into the contraction phase of the real estate cycle by the end of 2015, the PwC survey said.