"KORPACZ REAL ESTATE INVESTOR SURVEY"
Current Issue Highlights NATIONAL HIGHLIGHTS A few glimmers of economic improvement have been noted recently, such as better-than-expected employment numbers in November 2009. Consumers and businesses remain anxious about spending. Investors believe that the road to recovery for both the U.S. economy and the commercial real estate industry will be a long and bumpy one. Refinancing difficulties could easily sidetrack the U.S. economic recovery and detour the recovery of commercial real estate. OVERALL CAP RATE (OAR) ANALYSIS The average OAR increased for all Surveyed markets except six over the past three months. The amount of the OAR increase has declined. Investors are still concerned about the near-term performance of the real estate industry. VALUATION ISSUES Tenant improvement (TI) allowances vary across each main property sector, as well as across geographies. TIs are commonplace and vary based on whether the space being leased is shell space (raw, new space) or existing, second- generation space. The number of months assumed vacant on rollover has increased in all 28 Survey markets over the past year. TECHNOLOGY NEWS AND TRENDS Real estate is at the forefront of the sustainability initiative. One technology contributing to real estate’s sustainability efforts is document digitization. In the coming years, everything from acquisitions due diligence to site inspections to the overall tenant experience will be affected by real estate sustainability initiatives. ECONOMIC NEWS The buy-hold-sell barometer in Emerging Trends in Real Estate® 2010 suggests that next year will be a great time to buy commercial real estate assets. 2010 is expected to present many challenges as rents continue to decline, vacancies rise, and capital remains limited. Many investors who held investments, overleveraged, or bought late in the cycle now must face difficult tasks. REAL ESTATE CAPITAL MARKETS Over the coming year, commercial real estate pricing will be more influenced by what goes on in Washington, DC than by what happens with rents or occupancy rates. Policy makers in Washington, DC control much of what else will influence property pricing over the near term. Government policy has already had a positive influence on the industry and will likely determine the shape of its recovery. RESIDENTIAL DEVELOPMENT LAND - Special Report Public builders, flush with cash, have since re-entered some markets. Since public builders are in the home-building business, lots are being acquired to build on rather than bank. In certain markets, new home construction and sales in existing developments have accelerated. DOMESTIC SELF-STORAGE MARKET Although self-storage revenues have declined over the past several months, they remain relatively stable compared to other asset classes. For the most part, value declines to date are due to overall cap rate expansion. Overall, investors remain bullish on investing in self-storage assets. NATIONAL REGIONAL MALL The vacancy rate for regional and super-regional malls rose in the third quarter of 2009. Very little quality product is available for sale. NATIONAL POWER CENTER Power centers ranked as one of the least favored core property types in Emerging Trends in Real Estate 2010. 2 Landlords continue to focus on asset management and value preservation. NATIONAL STRIP SHOPPING CENTER MARKET Centers anchored by dominant supermarket and drugstore chains should outperform the retail sector as a whole in 2010. Investors are using much higher overall capitalization rates in their analyses now than they were a year ago. NATIONAL CBD OFFICE MARKET Landlords are dealing with diminished tenant demand, rising levels of sublease space, and declining rental rates. Owners with low leverage positions on existing assets will be able to withstand declining rental rates better than highly leveraged operators. NATIONAL SUBURBAN OFFICE MARKET Some of the highest gains in vacancy during the past year were reported in Los Angeles Tri-Cities, Palm Beach, and San Francisco. Over the next 12 months, participants expect property values for suburban office product to decline. ATLANTA OFFICE MARKET Negative net absorption is surging due to diluted tenant demand and incessant new construction. Overzealous office development and falling rental rates concern investors. BOSTON OFFICE MARKET Most investors remain nervously optimistic about this market. Sublease space nearly tripled in the CBD over the past year. CHARLOTTE OFFICE MARKET Sales activity is at a standstill. The majority of Survey participants anticipate overall cap rates to increase in this market over the next six months. CHICAGO OFFICE MARKET Most participants believe that market conditions favor buyers. Over the next six month, most Survey participants expect OARs to increase in this market. DALLAS OFFICE MARKET In spite of aggressive landlord incentives, lackluster tenant demand persists. 3 Investors are implementing more conservative underwriting in their cash flow analyses. DENVER OFFICE MARKET Landlords are offering attractive concession packages to entice new tenants and retain existing ones. Given such favorable market conditions for tenants, some deals are being signed in certain submarkets. HOUSTON OFFICE MARKET Rising unemployment is still stifling demand for office space. This market's average overall cap rate has risen steadily since the first quarter of 2008. LOS ANGELES OFFICE MARKET Some tenants are able to capitalize on lower rental rates, liberal concessions, and abundant space options. The average overall cap rate has risen for the fifth straight quarter. MANHATTAN OFFICE MARKET Many jobs have been lost here since the recession started. A lack of "normal" sales activity continues to make pricing assets in a deleveraging environment very difficult. NORTHERN VIRGINIA OFFICE MARKET This market continues to benefit from the leasing of space by the U.S. General Services Administration (GSA). Free rent offered to tenants has nearly doubled in the past year. PACIFIC NORTHWEST OFFICE MARKET Recession and banking troubles continue to negatively impact the performance of this market. Landlords have become much more willing to provide free rent. PHILADELPHIA OFFICE MARKET Lackluster leasing levels have placed increasing pressure on landlords to reduce rents for both new and existing tenants. Rising vacancy illustrates the impact of continuous negative absorption. PHOENIX OFFICE MARKET Over the past 12 months, free rent has risen. 4 Well-positioned tenants are executing both renewals and new leases. SAN DIEGO OFFICE MARKET Despite a favorable environment for tenants, leasing activity is down on a year-over-year basis. Many investors believe that there will be good buying opportunities at advantageous pricing in the near term. SAN FRANCISCO OFFICE MARKET Market fundamentals are not expected to recovery too quickly. Weaker tenant demand has prompted some owners to lower rental rates in order to secure tenants. SOUTHEAST FLORIDA OFFICE MARKET Like many other major office markets, the bulk of oversupply problems reside in the suburbs. Market fundamentals have shifted in favor of tenants. SUBURBAN MARYLAND OFFICE MARKET Tenants looking for space are finding generous concession packages. One top concern is the unknown of what the next big job-growth engine will be for the local economy. WASHINGTON, DC OFFICE MARKET This ranks as the number one market in Emerging Trends in Real Estate2010. Leasing activity has slowed while sublease space has grown. NATIONAL FLEX/R&D MARKET Most participants believe that buyers dictate market pricing. After six consecutive quarterly declines, this market's average initial-year market rent change rate increased this quarter. NATIONAL WAREHOUSE MARKET Performances vary greatly across individual metro areas. Several warehouse property owners have defaulted on loans, been foreclosed on, or declared bankruptcy. NATIONAL APARTMENT MARKET Tenant demand remains fragile. 5 The average overall cap rate has increased over the past year. REGIONAL APARTMENT MARKETS - NEW This quarter, both the Mid-Atlantic and Pacific regions debut in the Survey. Many investors believe that apartment fundamentals in Washington, D.C. will outperform other markets. In the Pacific region, investors are still anticipating rent loss in the initial year of their cash flows. NATIONAL NET LEASE MARKET Sales activity remains sluggish across all property types. The current priority among most investors is to seek deals with investment-grade tenants. NATIONAL MEDICAL OFFICE BUILDINGS (MOB) MARKET High-quality assets located on hospital campuses are back in vogue among both tenants and investors. Sales activity, especially for stabilized, well-located assets, is beginning to gain momentum. NATIONAL DEVELOPMENT LAND MARKET - Semiannual Report Prospects for homebuilders can only improve. Next-generation projects will orient to infill, urbanizing suburbs, and transit-oriented development. Smaller housing units - - close to mass transit, work, and 24-hour amenities - - gain favor among investors over large houses on big lots at the suburban edge. Over the next 12 months, Survey participants expect development land property values to decline. 6