NEW YORK, July 20 (Reuters) - U.S. commercial real estate will recover more quickly than in the 1990s downturn as a lack of financing limits new supply and investors flush with cash compete for properties, according to Prudential Real Estate Investors.
Prudential is “relatively optimistic” about office, retail store, apartment and hotel real estate, where large properties typically held by institutional investors are seeing multiple bids, albeit in rare cases when they are offered, Marc Halle, a manager of the Prudential Global Real Estate Fund, said on Tuesday.
“Last time it took five years for real estate values to go down to where they bottomed. ... We’ve done that now in about two years,” he told reporters in New York. “So we are going to see a faster recovery, a faster write-up in the market.”
Halle said his outlook refers to properties in major cities.
A lack of construction, due to the lack of funding, could keep new supply from hitting the market for up to five years. Rents are also bottoming, reducing the drag on income that is key to commercial real estate values, he said.
Halle’s outlook comes as other fundamentals for commercial property are declining. Many other investors expect delinquencies will worsen as building owners faced with maturing loans in coming years are forced to liquidate, pressuring prices lower.
But many buildings with loans in default are nearly fully occupied, and producing cash flows, Halle said.
Prudential is not looking at smaller or mid-tier cities, he said. Other real estate investors have said these are areas that will continue to suffer most.
There has been a lack of transactions in the market because owners are able to extend terms of loans and wait for the market to stabilize. While some mock the strategy as “extend and pretend,” Halle said it is a smart move.
“Loans are being pushed out a couple years because everyone sees fundamentals getting better,” he said.
Still, Prudential has not been a particularly active buyer. It has sold into the market as a “wall of capital” competes for assets, he said.
One caveat to Halle’s outlook is jobs, without which companies would have little incentive to expand use of commercial space. The employment trend is slow, but positive, he said.
Rising interest rates would also hurt, he added. (Editing by Leslie Adler)