PwC: Investors warming to ‘forgotten cities’

Investor confidence for secondary market US commercial real estate is rebounding, particularly within the office markets in secondary cities and Southeast Florida, according to a new report from PwC.

The New York-based accounting and consulting firm’s Real Estate Investor Survey for the second quarter of 2012 reveals that, with such cities as Denver, Phoenix and Miami seeing signs of job growth, investors are becoming bullish on their office markets. In addition, results from this quarter's survey also revealed that as the US economic recovery expands, commercial office properties are piquing investor interest, even in markets hard hit by the housing crisis and recession.

“Investors are now running to these forgotten cities that were left for dead because they were associated with single-family overbuilding,” Mitch Roschelle, US real estate advisory practice leader at PwC told PERE. “The reality is the office sectors in those markets are starting to rebound. That’s why investors are going to these markets before the herd shows up.”

Roschelle added that many investors are looking to go where the competition is less fierce, hence they are seeking out assets outside of gateway cities New York, Los Angeles, Boston and San Francisco.

Participants in PwC’s survey revealed that the market in which their confidence rebounded the most was within the Southeast Florida office sector. Of the 18 office markets in the firm’s survey, Southeast Florida posted the largest decline in its average overall capitalisation rate—down 84 basis points—as well as the highest average increase in its near-term market rent growth rate assumption—up 75 basis points. By comparison, these key stats held steady for Manhattan and were nearly stagnant in Washington, DC, two office markets often touted by investors as “strong” and “top performing.”

Emerging positive trends are also being reported by surveyed investors for the Phoenix office market. Although this metro area was hit by the housing crisis and recent recession, a lack of new supply, migration from out-of-state residents and companies and rising home sales are helping to ease its economic hardships, the report said. Further, the unemployment rate for the Phoenix-Mesa-Glendale Metropolitan Statistical Area (MSA) declined to 6.6 percent in April 2012, down from 8.2 percent from the same period the year prior. Likewise in the Miami-Fort Lauderdale-Pompano Beach MSA, the unemployment rate fell from 10.6 percent to 8.3 percent during that time.

By comparison, the New York-Northern New Jersey-Long Island MSA unemployment rate rose slightly from 8.1 percent to 8.4 percent.

In addition, a combination of positive job growth, declining office vacancy and stabilising rental rates rekindled investor interest for assets in Denver's office market. Citing data from Real Capital Analytics, PwC pointed out that the total volume of office sales surpassed $600 million in the fourth quarter of 2011 and exceeded $853 million during the first quarter of 2012. The majority of surveyed investors expect property values in the Denver office market to increase as much as 10 percent over the next 12 months with an average increase of 2 percent.

“As the economies start to improve in these markets, there are opportunities to fill office space,” noted Roschelle. “When you think of job growth, it means you’re creating the need for someone to sit in an office.” With this happening across many secondary US cities currently, it seems investors are remembering them once again.