| NEW YORK
NEW YORK Oct 21 U.S. commercial real estate in
2009 will face its worst year since the industry's depression of
the early 1990s, according to a leading survey of industry
investors, developers, lenders and consultants.
Commercial real estate values likely will drop
significantly, foreclosures and delinquencies will increase
sharply and property cash flows will fall, according to the 2009
edition of Emerging Trends in Real Estate, released on Tuesday
by the Urban Land Institute and PricewaterhouseCoopers LLP.
"Many property owners are drowning in debt, lenders are not
lending, and for many (industry professionals), property income
flows are declining," said Stephen Blank, ULI senior resident
fellow for real estate finance. "There is an unprecedented
avoidance of risk. Only when financing gets restructured will
pricing reconcile, giving the industry a point from which to
start digging out of this hole."
Absent that, real estate experts see the financial and
property markets bottoming in 2009 and floundering well into
2010, according to the report which surveyed more than 700
commercial real estate experts.
They also expect commercial real estate equity investments
to fall into negative territory for the first time in nearly two
While investors and owners this year have been grappling
with a frozen credit market that has brought sales to a halt,
next year they can expect a U.S. economic recession to usher in
rising vacancy rates and falling rents.
"People have been so focused on the credit crisis (that) no
one noticed the economy sneaking up to knock their legs out from
under them," one person surveyed said, according to the report.
Overall, experts are bracing themselves for commercial real
estate values falling by 15 to 20 percent from their mid-2007
peaks, with more severe declines for lesser-quality commercial
properties in secondary and tertiary markets.
They see U.S. housing values, the heart of the credit
crisis, bottoming in 2009.
Real estate experts as a whole said they believe that once
governmental intervention programs take effect and the credit
markets thaw, a second wave of bad debt and investments from the
commercial real estate market will come ashore.
"Then ugly reality sets in -- taking losses, writing down
values, and wiping out frothy gains from recent years," the
report said. "More banks and investment banks could fold. The
hedge fund casualty list will grow."
Long-term owners, who were more conservative in their
projections and use of debt, will be able to manage their way
through the downturn.
But those who piled on the debt to finance properties in the
year or so leading up to the market peak in 2007 may find it
difficult to meet their debt obligations.
Real estate investment trust stocks, which are already down
32.5 percent year-to-date, will lead any rebound, the report
said. The experts also said that the "left-for-dead" commercial
mortgage-backed securities (CMBS) markets, which helped fuel the
commercial real estate boom by offering cheap debt financing,
will revive, but in a more regulated form.
Experts say the bottom line is that the commercial real
estate market will rebound, but that the days of cheap debt
financing are gone, at least for the foreseeable future.
"Money will be made on riding markets back to recovery and
releasing properties, not on ... financing structures," the
In the meantime, those surveyed said they continued to favor
U.S. markets in coastal global pathway cities, but the pecking
order has changed. Seattle and San Francisco ranked at the top,
followed by Washington, D.C. New York tumbled to fourth,
weighted down by woes of the financial industry which had
accounted for about a third of the demand for office space.
They expect markets such as Florida, Southern California and
the Southwest to nose-dive, shot down by the housing bust.
By property types in the apartment sector should remain
relatively resilient as younger people linger as renters, rather
than turn into homeowners, the report said.
Retail is expected to hit the skids as consumers shy away
As for the rest of the Americas, Canada's more conservative
approach to lending and investing should help buffer the
country's real estate industry against significant fallout from
U.S. and European economic travail, the survey said.
Certain Latin American cities will provide investment
opportunities in 2009 because they lack supply of modern
commercial real estate properties, the survey said. Investors
said they prefer San Paulo, Mexico City, Rio de Janeiro, Buenos
Aires and Monterey.
(Reporting by Ilaina Jonas, editing by Matthew Lewis)