U.S. commercial real estate investors believe occupancy and rental rates in most U.S. markets will stay soft in 2012, but competition to buy property in a handful of promising areas could get dangerously hot, according to an influential survey released on Wednesday.
Almost three years after the U.S. economy hit bottom, a recovery seems to be nearly stalled. There is no driver of jobs to create demand for office space, boost consumer spending at malls and shopping centers, and raise demand for warehouses to store goods.
"Tenants hold all the cards and instead of expanding, some shrink their space requirement," one investor said during an interview compiled for the Emerging Trends in Real Estate 2012 survey.
The report by PricewaterhouseCoopers and the Urban Land Institute, involves a survey of 950 of the most influential U.S. real estate investors and executives in order to gauge their outlook for next year.
Investors risk overpaying for top properties in leading markets such as New York, Washington, and San Francisco, and certain secondary cities such as Austin.
Even as loans and equity become more readily available to finance purchases next year, investors are wise not to overpay or use too much borrowed money, the survey said. Instead they are advised to chose projects that meet their realistic cash flow projections.
Investors who buy well-leased stable buildings are expected to reap single-digit income returns, according to the survey. Some potential buyers of those properties may drop out of bidding fearing that pricing has outpaced the potential for cash flow.
Those who buy risker properties -- with high vacancy rates or in need of renovations -- may have to ratchet down their forecasts.
"Even projections of returns in the mid-teens look like a stretch," the report said. Investors expect buyers to become less enthusiastic and sellers' interest to peak.
"Investors who bought near market bottom in 2009 and 2010, consider cashing in some gains," the report said.
Investors remain sweet on apartment buildings, the focus of demand from those unable or unwilling to purchase a home. Lenders including Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), as well as insurance companies, are expected to be more than willing to underwrite new construction of apartment buildings, the survey said.
They remain interested in new warehouse investment near ports and international airport hubs.
Investors expect the hotel recovery to begin to wane, except in leading markets.
Another best bet is first-class well-occupied downtown office buildings, the survey said. Most types of commercial real estate, even shopping centers, that are located in dense areas where it is prohibitively expensive or impossible to build should increase in value.
Outside the United States, U.S. investors remain attracted to Canadian cities such as Vancouver and Toronto, seeing them as the most stable property markets in North America, with high occupancy rates, predictable rent flows and high barriers to new players.
Investors see Brazil maturing into a more stable core market. In Rio de Janeiro and Sao Paulo, for example, vacancies at top properties are going to be difficult to find.
But in Mexico, drug violence is expected to send investors fleeing.
(Reporting by Ilaina Jonas; Editing by Phil Berlowitz)