FLORIDA REALTOR NEWS
WASHINGTON – Oct. 13, 2010 – Commercial real estate industry investors and professionals see hopeful signs of a tempered commercial real estate market turnaround, according to a new survey, the Emerging Trends in Real Estate 2011 report.
The survey, released today by PwC US and the Urban Land Institute (ULI), finds that respondents have lowered their performance expectations, and now anticipate high single-digit returns for core properties and mid-teen returns for higher risk investments.
Without ample leverage and attendant risk, real estate assets cannot sustain higher performance, according to survey respondents. The survey finds that lenders with strengthening balance sheets finally stepped up foreclosure activity and disposition of properties, effectively resetting values 30-40 percent below 2007 peaks.
“The market is predicting extreme bifurcation as the capital flight to quality creates a greater separation between the trophy and less desirable assets,” says Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “Well-located and well-tenanted properties that can generate strong cash flow over the next several years are exactly what buyers and lenders want, according to survey respondents. As a result, prime apartments and office buildings in gateway cities are generating the most attention from the increasing pent-up sidelined capital.”
Debt market should loosen further in 2011
The report indicates debt markets thawing further – a trend that should continue in 2011 – as banks strengthen balance sheets, take their losses and step up lending, resulting in higher transaction volumes. It should be easier for borrowers to obtain refinancing if they own relatively well-leased cash flowing properties. However, overleveraged owners with high vacancies and rolled-down rents face uncertain prospects in the credit markets, including the increasing likelihood of foreclosure.
“Real estate market participants continue to see a gulf between buyers and sellers; however, there is an expectation that the ‘bid-ask’ spread will begin to close in 2011 as selling sentiment improves dramatically from last year’s all time survey lows, and buyers temper expectations for giant discounts,” says ULI Senior Resident Fellow for Real Estate Finance Stephen Blank. “Investors with cash could have excellent opportunities to seize market bottom plays by recapitalizing cash-starved owners or buying foreclosed assets.”
Respondents to the Emerging Trends survey cite the best investor bets for 2011, which include:
• Temper expectations – Buy well-leased core assets and look for 6 to 7 percent cash flows.
• Lock-in leverage – Mortgage rates can’t get much lower and cyclical bottom is the optimum time to leverage properties in order to magnify future value gains as property fundamentals ameliorate.
• Provide debt and recap equity – Players who fill the gap on assets with lowered cost bases can obtain excellent risk-adjusted returns up and down the capital stack, including mezzanine debt and preferred equity, if not loan-to-own opportunities.
• Focus on global gateways, 24-hour markets – Everybody wants to be in the primary coastal cities with international airport hubs.
• Favor infill over fringe – The ‘move back in’ trend gains force as twenty-something Echo Boomers want to experience more vibrant urban areas and aging Baby Boomer parents look for greater convenience in downscaled lifestyles.
• Patience is a virtue – Transaction activity will increase and distressed deals will appear.
• Buy or hold REIT – Survey respondents expect solid cash flowing returns.
• Buy land – It won’t get any cheaper than now, but prepare to wait for the right development opportunity.
• Exercise caution on distressed loan pools – They could be a recipe for disaster if assets aren’t underwritten properly.
Among property sectors, the survey finds that apartments outrank all other sectors –favorable demographics and the housing bust should increase renter demand and some interviewees forecast rent spikes by 2012 in some infill markets where development activity has ground to a halt. Readily available financing from Fannie Mae and Freddie Mac bolsters buying activity. Core players also like warehouses and infill grocery anchored retail, while full service center city hotels remain the top choice for opportunity investors. Suburban office gets the cold shoulder in the survey.
Now in its 32nd year, Emerging Trends’ annual industry outlook for the real estate and land use industry includes interviews and survey responses from more than 1,000 leading real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants.
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