U.S. commercial property market thawing

NEW YORK Wed Jun 24, 2009 2:02pm EDT

J. Allen Smith, Chief Executive Officer of Prudential Real Estate Investors speaks at the Reuters Global Real Estate Summit in New York, June 24, 2009. REUTERS/Mike Segar

J. Allen Smith, Chief Executive Officer of Prudential Real Estate Investors speaks at the Reuters Global Real Estate Summit in New York, June 24, 2009.

Credit: Reuters/Mike Segar

NEW YORK (Reuters) - The gap between U.S. commercial property buyers and sellers is narrowing, indicating the shattered market is closer to beginning the painful path to recovery, the head of Prudential Real Estate Investors said on Wednesday.

Prudential Real Estate Investors, or PREI, invests in commercial real estate-related debt and equity on behalf of pension funds and other institutional investors. The alternative investment arm of Prudential Financial Inc (PRU.N) had $42 billion of assets under management, including $26 billion in the United States, at the end of the first quarter.

"Just recently -- and by recently I would measure this in weeks not months -- we've seen the transaction market begin to show some strengthening," Allen Smith, chief executive officer, said at the Reuters Global Real Estate Summit in New York. "Credible players are appearing and bidding on assets.

"We'd seen that earlier, but the people who were showing up to bid frankly weren't terribly credible and often were really not prepared to close," Smith said. "We are now seeing people show up who fall into the institutional category and are clearly ready to close. We're more prepared to act on that as a seller than we might have been in the past."

The bad news is that the bidding prices for the properties are mirroring the speculation of the past few months: values have fallen 40 percent to 50 percent from their peak prices reached in 2007.

Other sellers also are getting closer but have not yet embraced the new price reality, and sales are being discussed but not done at a level that can clearly indicate market prices.

"Intellectually people understand that's where the market is headed, and yet transaction additivity remains extraordinarily low," Smith said.

Commercial real estate sales worldwide in the second quarter are expected to be off 67 percent from a year earlier, according to research firm Real Capital Analytics, with U.S. volume down 83 percent.

With the value declines, PREI's $42 billion in asset value is also likely to be less, Smith said.

The correction in the U.S. commercial real estate market, and even for some of the global markets, is going to be painful for a lot of people, particularly those who bought their properties using liberal amounts of debt financing.

"For a lot of people, particularly those who pursued highly leveraged strategies and entered this downturn 70 percent levered, this is a depression, because you're wiped out," Smith said. "It's going to be pretty bad and it's going to be pretty bad for a couple of years."

(Reporting by Ilaina Jonas)

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