Continuing good economic news and signs of increased activity among companies looking to add new space are helping to convince real estate investors that better days are ahead, according to the PricewaterhouseCoopers second quarter 2004 Korpacz Real Estate Investor Survey released today.
“While soft market conditions are likely to linger for the remainder of 2004 and into 2005, it is apparent that real estate investors have become more optimistic now that the worst seems to be behind us,” said Peter Korpacz, director, PricewaterhouseCoopers’ Global Strategic Real Estate Research Practice. “Nevertheless, many markets remain saturated with available space – thereby offering tremendous opportunities for tenants looking to either upgrade their space or relocate.”
While there has been a recent upswing in “space shopping” by tenants in a number of markets, there appears to be no great urgency to lock into specific deals – a situation that keeps rental rate growth to a minimum and encourages tenants to continue to ask for and receive favorable concession packages.
“Until companies become less hesitant about taking space and moving forward, market conditions will continue to provide tenants with the upper hand during lease negotiations,” the report notes.
But when it comes to sales transactions, landlords and existing owners should enjoy a decided upper hand, especially for transactions involving stable assets. Thanks to a lack of alternative investment options and pent-up demand from nonleveraged buyers, the amount of capital targeting commercial real estate is huge, with prices for the best assets remaining “unbelievably aggressive,” the report finds.
“Even in markets where severe supply-demand imbalances are likely to keep a full recovery from happening in a timely manner, such as Boston and San Francisco, properties that offer limited near-term lease expirations, credit tenants and stability are on the receiving end of hefty prices,” according to the report.
Faced with extremely aggressive bidding competition for the top assets, a number of investors are turning to so-called distressed properties – typically assets with either current or near-term risks attached to them, such as large amounts of vacant space, upcoming lease expirations, and/or tenants with low-rated credit. But even these properties are being priced aggressively by sellers who have taken note of the strong demand for real estate, says the report, and it may take a rise in interest rates to bring about some much-needed relief for investors.
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