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Investor Appetite Strengthens for Quality Commercial Real Estate

Commercial real estate fundamentals are still ailing from the recession and lack clear signs of near-term improvement. As a result, investors remain focused on[IMAGE]core assets and proven markets, according to the third quarter findings of ""PricewaterhouseCoopers' Korpacz Real Estate Investor Survey"":http://www.pwc.com/us/korpaczsurvey.

The report highlights an improved lending environment with strong appetites from both debt and equity capital for quality real estate assets, with some surveyed investors noting a surprise at the speed at which debt availability has rebounded over the past year.

With a limited number of quality offerings to absorb all the pent-up capital, the report reveals that competition is strong among buyers of top-rated assets, causing overall capitalization (cap) rates to remain on a downward trend.

Overall cap rates refer to the initial rate of return anticipated by a buyer and are a key measure of an investor's assessment of property income and value expectations. They tend to move in step with interest rates, which are currently very low by historical standards.

PricewaterhouseCoopers found that average overall cap rates declined in 26 of the survey's 31 markets over the past three months. Surveyed investors expect overall cap rates for core assets to either flat line or decline further through the remainder of this year, as they foresee interest rates staying low and the debt markets to continue facilitating property trades.


""Many investors were waiting to pounce on the anticipated overflow of underwater and distressed quality assets, but that scenario never quite materialized as expected,"" said Susan Smith, director of the real estate advisory practice at PricewaterhouseCoopers and editor-in-chief of the survey.

""With the skittish economic recovery, little rent growth, and minimal leasing velocity, a flight to quality is evident among investors. Sellers offering quality commercial real estate for sale are garnering a lot of attention,"" Smith said.

The report finds that the apartment sector is continuing to lead the recovery with fundamentals having bottomed in most markets where solid improvements in occupancy and demand are being seen.

Even as the U.S. economic recovery signals uncertainty, lodging demand is continuing to grow at a brisk pace, creating cautious optimism for this sector. The report finds that business travelers have returned in many markets and are delivering an important short-term boost to demand. However, the long-term demand growth is somewhat muted by the on-going pressure on room rates.

After 11 consecutive quarters of vacancy increases, the warehouse sector is finally showing signs of recovery, according to the survey. A downward shift in vacancy occurred in the second quarter in this sector, due to improvement in global trading, freight shipments, and manufacturing activity.

As a whole, the office market continues to struggle. Although vacancy rates have improved slightly, job growth and feeble tenant demand remain top concerns, the report notes. Lackluster fundamentals are keeping investors and lenders focused on quality office properties and top-tier markets.

With the fragile economy continuing to hamper consumer spending, the retail sector is showing mixed reviews. While leasing activity remained sluggish in the national mall market during the second quarter, surveyed investors note that the dynamics of the leasing market are stabilizing.