Study: Investors still looking for well-leased properties.

According to PricewaterhouseCoopers Korpacz Real Estate Investor Survey, investors continue to pursue well-leased properties in the best performing markets and prices for prime commercial real estate continues to climb, but the fact that industry fundamentals continue to weaken at the same time has raised concern among investors.

"Even the most optimistic investors worry that the longer the downturn persists, the greater likelihood of widespread income losses. Rental rates will fall, vacancy rates will rise, and overall cap rates will fail to offset the resulting drop in income that will occur," said Peter Korpacz, director, Global Strategic Real Estate Research Practice, PricewaterhouseCoopers.

Despite such concerns, institutional and foreign investors and real-estate investment trusts continued to buy select commercial real estate in the fourth quarter of 2002, which raised prices sharply. Particularly, regional malls and well-leased office buildings in key markets were caught in bidding wars.

Other key findings of the report indicate:

* Apartments continue to prevail as the most sought after property. Readily available and inexpensive debt has enabled many investors to remain assertive buyers.

* The majority of recent acquisitions by REITs have been in the retail sector. By comparison, both institutional and foreign investors have been active buyers of office properties. Foreign acquisitions of U.S. commercial real estate nearly doubled in 2002. Over 80% of foreign investment has been in the office sector, primarily central business district (CBD) towers. The average sale price paid by a foreign investor is almost $60. million; nearly double the market average. Specifically, 45% of foreign capital has been invested in Manhattan, while another 20% has gone to Chicago this year.

* Fierce competition and investor demand for commercial real estate has raised sale prices and lowered overall cap rates for nearly all properties that offer "credit and term." However, only the best performing office properties, in the most attractive markets are of interest to investors. Assets with strong tenancies and limited near-term leasing risk are of greatest value and, despite rising vacancy rates, capital continues to flow into the national CBD office market.

* The number of regional malls trading has increased during the first nine months of 2002 throughout the country with the largest concentration of dollars invested in the Midwest A large percentage of deal flow has been completed in smaller metro areas rather than larger metropolitan markets.

* Investors are least interested in acquiring community centers, power centers, suburban office buildings and R&D property.

* The national suburban office market continues to suffer from a glut of available office space. Tenants are negotiating lower rents, high tenant improvement allowances (TIs), and large amounts of free rent. The survey indicates that an overwhelming majority of participants (80%) indicate that concessions are prevalent throughout the national suburban office market. By comparison, last year only 65% of participants indicated that concessions were commonplace.

* Investors conclude that the reverting of sublease space back to direct vacant space will be the next major income-reducing obstacle for office markets to overcome. Although the rate at which sublease space has been returned to many individual markets has declined considerably over the past several months, sublease space still adds a huge burden to the national office sector, which is already distressed by lack of demand.

* Favorable financing terms have enabled small, private investors to compete head-to-head and favorably against major institutions and REITs. Toward this end, local buyers account for approximately 40% of Southern California apartment transactions with REITs and institutions representing about 30% each. Furthermore, over one third of investments from the private sector have been concentrated in the West, where a greater proportion of personal wealth was created during the last real estate cycle. In contrast, foreign investors have favored the Northeast. Southern California, New York, Washington D.C. and Chicago continue to rank as the most favorable investment opportunities.

PricewaterhouseCoopers Korpacz Real Estate Investor Survey is published quarterly by PricewaterhouseCoopers. Survey participants represent a cross section of major institutional equity real estate investors who invest primarily in institutional-grade property. For information about subscribing to this publication or about other products, call [phone] or visit www.pwcreval.com.