Investors High on Core Office Market

Investors are becoming more confident in the office sector, according to a PwC survey of real estate investors from the fourth quarter of 2011.

Mitch Roschelle, partner with PwC and leader of the firm's U.S. real estate advisory practice, said expectations of strong tenant retention in 2012 have investors feeling bullish on office companies.

"Investor enthusiasm is on the uptick in the office sector because of improved fundamentals," Roschelle said.

He added that surveyed investors expect that tenants will stay put and rents will increase. Most companies are making due with smaller work forces and asking for more productivity from their remaining workers, according to Roschelle.

"The stress and interruption of an office move is not something most companies want to consider, thus the motivation to stay put," Roschelle said. "As tenants stay, landlords have more ability to raise rents."

Core markets, such as New York and Los Angeles, are paving the way for rent growth in 2012, according to Roschelle. He said such markets attract investors because they've historically had a better employment base.

However, when it comes to secondary markets, Roschelle said investor interest often depends on the local economy.

"Secondary markets that are concentrated on the tech, energy and education sectors, such as Austin, Raleigh-Durham and Charlotte, have a diverse enough employment base where investors are optimistic for job growth," he said.

Otherwise, buying office assets beyond the core markets remains challenging, according to Roschelle. Investors needing a deep knowledge of the local market, and lenders tend to use more conservative underwriting standards, he said.

The sector facing the strongest headwinds in 2012 is retail, according to the report. Roschelle said that according to the PwC's projections, the retail sector will be facing a downturn in 2012 that will continue into 2013. A stalled economy with reduced consumer spending and diminished demand for retail space continues to affect the sector, he said.