Investors Weigh In on Real Estate’s Value in Current Market

The commercial real estate landscape has shifted since 2Q11, with factors such as volatility in public equity and debt markets, fears of a double-dip recession, stagnant employment, the U.S. credit rating downgrade, and global debt crises impacting investors’ views on the market, according to PricewaterhouseCoopers 3Q11 Real Estate Investor Survey.

As a result of insecurities among businesses and consumers, "investors sense that the industry has entered a period of slower growth," which may disrupt the slow-but-steady commercial real estate recovery, according to the report. However, investors remain cautiously optimistic about the sector’s long-term viability, noting its relative stability during challenging economic periods in comparison to other investments. As an asset class, commercial real estate’s ability to generate stable, predictable cash flows over a holding period is the primary reason for continued investor appetite.

The current period marks the fifth consecutive quarter of decreasing capitalization rates, with the average overall cap rate dropping in 26 of 31 markets surveyed. The largest cap rate decreases have occurred in central business districts and apartment markets nationwide, signaling that investors favor these two asset types, according to the survey. The aggregate overall cap rate for 3Q11 is 7.6 percent (excluding hotels), compared to 8.6 percent at the same time last year.

Buyer competition currently is very tight, with sellers gaining more control over asset pricing in some subsectors and top markets. Approximately 31.4 percent of survey participants believe market conditions favor buyers -- down from 58.6 percent last year and 80 percent two years ago. At the same time, 26.4 percent of respondents view the market as favoring sellers, which is up from 12.3 percent last year and just 7.0 percent two years ago.