U.S. property bad and seen getting worse: survey

Another property doom and gloom report from Reuters dated 17 March 2009

By Ilaina Jonas

NEW YORK (Reuters) - The U.S. commercial real estate market is bad and investors expect it to get a whole lot worse, according to a closely followed survey by PricewaterhouseCoopers.

"As investors painfully watch the value of their assets decline, many feel troubled knowing that the ills of the U.S. economic recession have yet to fully impact the commercial real estate industry," starts the first-quarter Korpacz Real Estate Investor Survey of more than 100 investors from real estate investment trusts, pension funds, private equity firms and insurance and mortgage companies.

Many investors are struggling with ways to preserve the value of their investments and maintain ownership in the wake of restricted debt sources, declining tenant demand, and falling values, the survey said.

Real estate investors do not expect the commercial real estate sector to rebound until well into 2010 at the earliest, according to the survey.

"Investors are not expecting this recovery, when it does happen, to be a sharp recovery where it hits bottom and bounces up," said Susan Smith, a director at PricewaterhouseCoopers in the real estate group and the survey's editor.

"It's going to be a very slow sluggish recovery," she said. "There are just too many things right now that are impacting the industry to make investors very confident about what's going on," she said.

Some property owners are lowering rental rates and increasing concessions, which results in lower revenue.

Compared to a year ago, the average amount of free rent landlords are offering has increased to six month in several major office markets, such as Boston, where it rose from 2.15 months; Manhattan, where it grew from four-and-half months and San Francisco, where increased from three-and-half months, the survey said.

One investor in the survey suggested "making the best deal you can today because tomorrow's deal will be worse."

Investors believe that the overall cap rates, or returns, for U.S. commercial real estate over the next six months will rise by an average 0.47 percentage points from 7.49 percent in the first quarter 2009, the survey said. When cap rates rise, prices fall.

In the retail real estate arena of malls and shopping centers, investors expect power centers, home of the big box stores, to lose value by the greatest amount, with cap rates rising by an average of 0.744 percentage points from 7.63 percent, according to the survey. They see cap rates for regional malls rising 0.65 percentage points.

Investors expect rent and occupancy for retail properties to continue to decline in 2009, the survey said. Last year, store closings rose 50.1 percent to 6,913 and forecasts call for more than 8,000 store closings in 2009, according to the survey.

Most investors said they expect the eroding fundamentals to press values down by 10 percent to 26 percent from the 2007 peak, with the most pessimistic investors seeing declines of about 40 percent, the survey said.

Investors expect that values of regional malls will fall an average of 3.25 percent and as much as 15 percent over the next 12 months. The decline will depend upon the location and quality of the mall.

(Editing by Phil Berlowitz)