According to the survey, overall capitalization (cap) rates, a key measure of expectations of property income and value, have started to stabilize and even slightly decline in certain markets and for quality assets. This trend may help to stabilize values since weak fundamentals are still a drag on value appreciation. Over the next six months, survey participants forecast overall cap rates to hold steady in 19 of the survey's 30 markets. Last quarter, just two markets had such a forecast from survey participants.
"Following the onset of the recession and the credit crisis, underlying fundamentals were deteriorating and overall cap rates were expanding simultaneously and quickly, causing values to plummet," said Susan Smith, director, real estate advisory practice, PricewaterhouseCoopers, and editor-in-chief of the survey. "The worst seems to be over, according to survey participants, as investors suggest that the bottom is near, if not here, particularly for better-positioned markets and assets."
In the survey's national and regional apartment markets, the low end of the range for overall cap rates decreased 75 basis points this quarter to 5 percent, pushing the averages down 18 and 50 basis points, respectively, due mainly to the numerous bidders showing up to buy quality assets in good markets. At the same time, average marketing times are down in these two survey markets, further signaling restored confidence among many investors.
Better Comfort Level to Spur Sales Activity
Surveyed investors comment that owners and lenders are finally coming to grips with what assets are truly worth. As a result, the report finds that while 2010 is expected to be a slow year for sales activity by historical comparison, there could be marked improvement from 2009, as banks appear more willing to lend although underwriting remains very conservative and more equity is needed to secure debt.
"There is a tremendous amount of capital seeking real estate opportunities, and now is still a great time to buy. Many investors in our survey still anticipate incurable deleveraging issues on the part of both lenders and owners to provide opportunities to acquire quality assets at below-peak pricing, and there's strong competition among buyers for such deals, as investors indicate increasing activity with both the number of bids and good offers," added Smith.
According to the report, looming debt maturities remain a top-of-mind issue among surveyed investors, who believe the out-of-balance loans coming due over the near term will present major hurdles for owners and lenders. "The industry keeps looking to lending institutions and special servicers of commercial mortgage-backed securities to provide forced sales, but some investors surveyed cite that more distressed selling will likely come from borrowers, who are more comfortable with where the market is now and will accept a loss in order to move on," Smith commented.
