* Retail, office properties hit hard; apartments recover
* Washington DC is top market; San Francisco, Boston next
By Nick Zieminski
NEW YORK, Nov 5 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.
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. For a related analysis of Brazil's real estate
prospects, see [ID:nN26189252]
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.
Metropolitan markets will be hit nationwide, but experts
say values will be supported in top-tier markets, thanks in
part to opportunistic institutional and foreign buyers.
Washington, D.C., has the brightest investment prospects
and healthiest fundamentals, followed by San Francisco, Boston
and New York, according to the report. Washington is typically
the top market during recessions because of demand for space
from government and related activity, like law firms.
Those surveyed said they expect, and hope, the U.S.
government will take a more active role in regulating the real
estate industry. But they are not looking to the government to
solve the crisis with something like the housing tax credit or
the Cash-for-Clunkers auto program that helped those
The report also includes advice for participants in
commercial real estate. For investors, pointers include doing
deals in cash, not rushing into deals, focusing on quality
properties, and sticking to global gateway cities.
In terms of property sectors, the report suggests buying
apartment buildings and hotels, as well as distressed
properties in resort developments. Industrial warehouses may
also be an attractive investment as inventories rebuild.
For developers of new projects, the advice is blunt: Write
off 2010, as well as 2011 and probably 2012.
"You can close up shop, hit the links," the report said.
"Forget about construction financing -- that's a pipe dream."
(Reporting by Nick Zieminski; editing by John Wallace)