Debt Is Still Plentiful for Commercial Property Investment
Vacancy rates in office markets nationwide continue to decline, while debt and equity capital continue to flow into the commercial real estate sector, according to a PricewaterhouseCoopers fourth-quarter 2005 real estate investor survey.
Last year, 75% of downtown office markets saw year-over-year declines in overall vacancies, compared to only 25% that saw such declines between 2002 and 2003, according to Peter Kopacz, director of PWC's global strategic real estate research practice.
As well, in the suburban office market sector, 80% of markets saw year-over-year vacancy declines for 2005, compared with only 29% between 2002 and 2003.
"As vacancy rates continue to edge down in each sector of the industry and with alternative investment options still being viewed dubiously by investors, capital continues to flow into each sector of the real estate industry from a range of sources - private, public, institutional and especially foreign investors," Mr. Korpacz said.
This quarterly survey of real estate industry professionals also found that as consumer spending continued strong in recent months, in spite of higher energy prices, many regional mall tenants are seeing "impressive" year-over-year gains in retail sales.
And the multifamily sector has benefited from high home prices, soaring construction costs and rising mortgage rates.
These factors have combined to increase demand for apartment properties in recent months. Another finding is that as industry fundamentals continue strong, many developers are looking at opportunities for new land development in each of the commercial property sectors. The survey also came up with different findings by sector.
In the self-storage industry, capital continues to flow in, but there is concern that the pricing is not supported by the underlying fundamentals. PWC cautions that self-storage investors should pay more attention to what drives demand, instead of just looking for new deals to do.
Investment demand for retail properties is also high and has caused a slight decline in the average overall capitalization rate for mall properties, PWC reports.
"Power center" retail properties continue to attract active interest from investors, thanks to good retail sales performances by a number of these retailers, but investors need to be cautious about which of these assets they choose to pursue, according to PWC.
Office markets saw vacancies decline, with downtown vacancies declining from 13.7% in the second quarter of 2005 to 13.1% in the third quarter.
The best performing office markets - San Francisco, Oakland and Orange County - were all in California. The Phoenix downtown office market also continues to do well, with an overall vacancy rate of 15.4% in the third quarter, down 2.3% from the third quarter of 2004.
And suburban office markets nationally have seen a decline in speculative new construction, partly as a result of high construction costs, and this coupled with an improving job market is helping fuel a recovery.
This is evidenced in the decline in construction of speculative office space to 5.27 million square feet in 40 suburban office markets in the first nine months of 2005.
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