PriceWaterhouseCoopers: Investors Want High Quality Assets But Pickings are Slim

The money is out there, but it doesn't have a lot of places to go.

June 21, 2010
By Barbra Murray, Contributing Editor

Courtesy Flickr Creative Commons user @boetter

Those investors who sat on the sidelines with wads of cash, eagerly awaiting the opportunity to acquire top-notch commercial real estate properties with moderate price tags are sorely disappointed, according to the second quarter PricewaterhouseCoopers’ Korpacz Real Estate Investor Survey. The types of properties they seek just aren’t as plentiful as was expected.

“The low percentage of distressed trades as of late reflects investors’ preferences as most buyers are steering clear of ‘junk’ and focusing only on core assets, according to survey participants,” Susan Smith, director of PwC’s real estate advisory practice and editor-in-chief of the survey, noted in a prepared statement.

The money is out there, but it doesn’t have a lot of places to go. Even investors–well, the right investors–without cash on hand have been experiencing an increasing friendliness among lenders when seeking to snap up high-quality assets in top markets. The survey covers 30 separate markets across the country. Non-core assets in second-tier locations have not incited the same warm and fuzzy feelings among lenders.

But, as buyer demand for institutional-grade properties increases, those bottom-of-the-market deflated price tags are only going to get bigger and bigger. Respondents, Smith said, “Cited that strong competition among well-capitalized buyers is helping to elevate sale prices and lower overall cap rates for many prime properties.” With the increase in prices, reluctant sellers will start to market more properties, as per the report.

Judging by survey participants’ responses, industrial real estate appears to be among the most appealing sectors. Although market conditions continue to soften, they’re softening at a slower rate. So, with a more tangible turnaround in sight, investors are flocking to premier warehouse properties. Buyers are also becoming increasingly attracted to the multifamily market, which is recovering faster than other commercial real estate sectors. The hardest hit sectors haven’t climbed very far up the list of desired asset types. Respondents noted that the retail sector continues to struggle; and the office sector, with the pace of the return of space to the market declining, is beginning to show slight increases in occupancy levels as it heads into a slow recovery.

Regardless, investors perceive less risk in the market, especially for prime properties in prime markets, according to the report. The average overall cap rate declined in 17 of the 30 markets covered in the survey during the second quarter, and investors anticipate that cap rates will either decline or remain steady in the majority of the markets over the next six months.