PwC Korpacz Survey: Cautiously Optimistic

PricewaterhouseCoopers just released their quarterly Korpacz Investor Survey.

It appears investors are thankful 2009 is behind them and eagerly await new opportunities in 2010. Their headline for Q1 2010: Investor Sentiment Improves, but Challenges Persist in 2010.

Much of investors’ increased confidence is rooted in improving economic indicators, a thawing debt market and a pick up in tenant inquiry activity.

“Economic numbers are providing a bit of confidence,” remarks a participant. “On the lending side, there seems to be more willingness to get money out, particularly among life insurance companies,” comment a few investors. “Visits by prospective tenants have increased at our office properties across the country,” adds another.

Relative to capitalization rate trends, many feel the market has finally bottomed.

The hopefulness conveyed by investors is illustrated in the Survey’s quarterly overall capitalization (cap) rates, which investors note have started to stabilize and even dip for quality assets and in good markets. “We very much sense that the bottom is near, if not here, for better-positioned markets,” shares a participant. At the peak of the cycle in mid-2007, the aggregate average overall cap rate in the Survey was 6.87%. Two years into the recession, the average reached 8.36% (up roughly 150 basis points). Last quarter it ticked up a mere 13 basis points to 8.49%. This quarter, it actually dipped seven basis points to 8.42%

Even with this renewed optimism, many remain cognizant of “mushrooming” delinquency rates in the CMBS market, particularly in the 2006 to 2007 vintage.

Delinquent commercial mortgage-backed securities (CMBS), which totaled less than $20.0 billion in October 2008, mushroomed to $65.2 billion at the end of November 2009, according to Trepp.

At the same time, the default rate for commercial property mortgages held by U.S. banks has nearly doubled, rising from 1.6% in 2008 to a 15-year high of 3.8% in 2009, according to the FDIC.

Despite these ominous trends, the deluge of underwater assets that numerous investors predicted would saturate the market by now has yet to occur.

While there seems to be a consensus that the market has bottomed, many remain in disagreement relative to where we go from here.

No matter the direction, one thing remains constant. We always view this quarterly survey as a must read; particularly when buyers, sellers, brokers and appraisers are grappling to understand where the market is due to an absence of meaningful sales comparables. PwC’s Korpacz Investor Survey remains to stand out as one of the industry’s best resources to benchmark investor return expectations.