U.S. commercial real estate to bottom in 2010-survey

By Nick Zieminski

NEW YORK (Reuters) - The U.S. commercial real estate market, slammed by the credit squeeze and recession, is likely to hit bottom in 2010, according to a survey of industry investors, developers, lenders and consultants.

Commercial real estate values will fall 40 percent, on average, from their peaks in mid-2007, and up to 50 percent in some sectors, according to the 2010 edition of Emerging Trends in Real Estate, released on Thursday by the Urban Land Institute and PricewaterhouseCoopers LLP.

It will be the worst commercial real estate decline since the Great Depression, eclipsing the 1990s savings-and-loan crisis, according to the report.

"Not surprisingly, the overwhelming sentiment (of) interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.

Hardest-hit will be retail and office properties, reflecting a weak job market and cautious consumers. A growing population of men and women in their 20s will help the apartment sector recover earlier than other commercial real estate sectors, the report said.

"It's going to be a year that's going to provide investors with tremendous opportunities at generational, cyclical lows," said Susan Smith, a director in the real estate advisory practice at PricewaterhouseCoopers in New York. "There's a tremendous amount of money waiting on the sidelines."

Property owners who borrowed too much, or made unrealistic assumptions about returns, will be forced to sell, and the winners will be those with cash, she said.

RECOVERY

A recovery will begin to take root once U.S. financial institutions, infused with government cash, are in a position to foreclose on, or strike deals with, overextended borrowers. Banks will also start to dispose of properties, as will the government, which is going to hold real estate assets acquired from failed regional lenders, according to the report.

But debt markets will remain constrained in 2010 as banks increase lending only slowly, and a weak jobs market will prevent a robust recovery, at least initially.

The annual report, in its 31st year, is based on interviews with about 1,000 developers, investors, real estate service firms, banks and others.

Canada's real estate markets are seen escaping the worst of the U.S. credit collapse but are not immune to lower demand, the report said. Values are seen falling by up to 20 percent from their peaks.

Mexico's real estate fortunes are seen declining in line with those of the United States, while Latin American investment opportunities center on Brazil, a rising global economic power.

DEVELOPERS NOT WANTED

Interviewees cited jobs as the most important economic issue affecting real estate development and investment next year, followed by interest rates, wages, and inflation.