Investors Exploring Riskier Deals

With investors gaining confidence in the overall health of the economy, they’ve become more willing to look beyond the safest commercial real estate assets, according to a new report from PricewaterhouseCoopers LLP (PwC).

The market downturn had investors looking almost exclusively for trophy assets in top-tier markets or properties available at steeply discounted prices, PwC said in the “PwC Real Estate Investor Survey” for the fourth quarter of 2010. Now, though, they’re beginning to seek out opportunities in secondary locations, as well as evaluating less high-profile assets, according to the report.

“This time last year investors were solely focused on ‘treasures’ or ‘traumas,’ properties that were either top-notch quality or significantly discounted due to sellers in distress, and there was no appetite for assets in the middle of the spectrum,” noted Mitch Roschelle, partner with PwC and leader of the firm’s U.S. real estate advisory practice. “Now, many of them are looking to widen their investment parameters and take on additional risk as they see signs that the economy and the industry are slowly healing.”

PwC pointed out that in addition to the gradual economic recovery, the flood of capital chasing marquee assets has created greater competition for premier properties. As a result, opportunities considered to be on the riskier end of the scale now look more appealing, the report said.

However, Susan Smith, director with PwC’s real estate advisory practice and editor-in-chief of the survey, downplayed the apparent shift in investors’ general risk tolerance.

“The sentiment among investors has improved significantly from a year ago, demonstrating an acceptance of where the market is today and where it will likely be in the near term,” Smith said. “Although some investors are now looking to take on more risk, a full movement to secondary markets and riskier plays won’t occur until a healthier U.S. employment picture develops. To investors, job creation is the missing element needed to foster a full recovery, restore confidence, and, in turn, widen the tolerance for risk.”

PwC also found that capitalization rates are compressing in the vast majority of geographic regions across the country. Of the 31 markets included in the survey, 27 saw decreases in their average overall cap rate in the last quarter. (credit a. kenney


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