COMMERCIAL REAL ESTATE MARKET TO HIT BOTTOM NEXT YEAR

From CAR Newsline, email dated October 29, 2008:

Real estate industry experts expect financial and real estate markets in the United States to bottom in 2009 and then flounder for much of 2010, with ongoing drops in property values, more foreclosures and delinquencies, and a limping economy that will continue to crimp property cash flows, according to a recent report by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP. Commercial real estate faces its worst year since 1991-1992, with projected losses of 15 percent to 20 percent in real estate values from the mid-2007 peak, according to “Emerging Trends in Real Estate® 2009.”

Financial institutions will continue to be pressured into moving bad loans off balance sheets, using auctions to speed up the process, while investors will be discouraged until the “bloodletting” is over, the report said. When that occurs, cash and low-leverage buyers will be king; surviving banks will impose strict lending guidelines; commercial mortgage-backed securities will revive, but in a more regulated form; and opportunity funds will need new investment models, the report said.

“The industry is facing multiple disconnects,” said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank. “Many property owners are drowning in debt, lenders are not lending, and for many, property income flows are declining. 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.”

Distress in the housing market is benefiting the apartment market, which the report lists as the number-one buy. Moderate-income apartments in core urban markets near mass transit offer the best buy, a trend that carried over from the previous year. The main beneficiaries of the real estate downturn in the U.S. are cash-rich offshore buyers, whom the report predicted will continue to take advantage of the weak dollar, and will buy trophy properties in major 24-hour cities, according to the report.