Real estate investors in the US are expecting market rents to fall in 2009, with the Manhattan, Denver and San Francisco office sectors some of the worst affected.
In its latest report, accounting firm PricewaterhouseCoopers said investors were using much lower rent growth rate assumptions when valuing real estate assets, with many waiting “nervously” for fundamentals to weaken.
The PricewaterhouseCoopers Korpacz Real Estate Fourth Quarter Investor Survey said that initial-year market rent change rates had declined on average 175 basis points over the past 12 months, with Manhattan, Denver and San Francisco recording some of the steepest falls.
Investors predict Manhattan office rents will decline around 2.1 percent, with Denver office rents dropping 2 percent and San Francisco office market rents falling 1.8 percent.
“One message came across loud and clear from investors: the nation’s harsh economic environment will continue to negatively impact commercial real estate values throughout 2009,” said Tim Conlon, partner and US real estate sector leader for PricewaterhouseCoopers.
“Large job losses were noted in the retail, services, and professional-and-business-services sectors in November 2008, leaving investors nervously waiting for the frequently mentioned “lag effect” to further hurt both fundamentals and values,” he added.
The report said cap rates were expected to rise on average 45 basis points, and possibly increase by around 200 basis points in some areas. The freeze in property deals has, however, left investors unable to assess the situation fully, the report warned.
Some sectors are expected to rebound faster than others, with multifamily and warehouses seen as the least volatile assets. The report said an analysis of US real estate cycles from 1999 to 2012 suggests that the retail and office sectors will follow after.
During the past quarter, reduced consumer spending, weak retail sales, store closures and negative economic issues have kept investors out of the regional retail market in the US, with some investors expecting values to fall as much as 15 percent. Retail investors are therefore concentrating part of their energies on necessity shopping centres, such as grocery-anchored strip malls.