Commercial Real Estate Has Long Road Ahead to Recovery
By: Carrie Bay
Commercial real estate in the United States has a “long and bumpy” road ahead with stability more than a year away for nearly every property type, according to a study commissioned by “PricewaterhouseCoopers”:http://www.pwc.com. The firm’s fourth quarter Korpacz Real Estate Investor Survey shows that investors don’t expect a recovery in the commercial sector until late 2011 or 2012.
What’s more, difficulties refinancing under tight credit conditions as billions in commercial mortgages comes due in 2010 could further delay a commercial real estate upturn and easily sidetrack the U.S. economy’s delicate recovery.
According to PricewaterhouseCoopers (PwC), many commercial real estate investors who held investments, overleveraged, or bought late in the cycle now face struggles because 2010 is expected to present many challenges as capital remains limited, rents continue to decline, and vacancies. But even with these snags, the firm says next year will be a great time to buy commercial real estate assets.
Over the coming year, commercial property prices will be more influenced by what goes on in Washington, D.C. than by what happens with rents or occupancy rates, PwC says. Government policy has already had a positive influence on the industry and will likely determine the shape of its recovery in the near-term, the firm contends.
On commercial real estate value cycles, PwC says the majority of office stock will remain in recession in 2010. In 2011, the amount of industrial stock in recovery will nearly equal the total in recession, and the amount of multifamily stock in recession is expected to stay slightly ahead of the total in recovery through 2010.
In the suburban office market, some of the highest gains in vacancy during the past year were reported in Los Angeles Tri-Cities, Palm Beach, and San Francisco.
Over the next 12 months, participants expect property values for suburban office properties to decline. The Washington, D.C. office market holds the most promise going into 2010. Leasing activity here has greatly diminished while the sublease market has grown.
In the multifamily/apartment sector, tenant demand remains fragile. PwC says in the fourth survey, many investors believe that apartment fundamentals, too, in Washington, D.C. will outperform other markets. In the Pacific region, investors are still anticipating rent loss in the initial year of their cash flows.
Public builders, flush with cash, have since re-entered some markets. Since public builders are in the home-building business, lots are being acquired to build on rather than bank, Pwc reports. In certain markets, new home construction and sales in existing developments have accelerated.
Prospects for homebuilders can only improve, says PwC. Next-generation projects will orient to infill, urbanizing suburbs, and transit-oriented development. Smaller housing units, close to mass transit, work, and 24-hour amenities, gain favor among investors over large houses on big lots at the suburban edge. Still, over the next 12 months, investors surveyed expect development land property values to decline overall.
Although self-storage revenues have declined over the past several months, they remain relatively stable compared to other asset classes, PwC says. Overall, investors remain bullish on investing in self-storage assets.
For the warehouse market, PwC says performance varies greatly across individual metro areas, but a large number of warehouse property owners have defaulted on loans, been foreclosed on, or declared bankruptcy.
Sales activity currently remains sluggish across all property types. PwC says the current priority among most investors is to seek deals with investment-grade tenants.
Real estate is at the forefront of the sustainability initiative, and one technology contributing to progress in this area is document digitization, according to the PwC survey. In the coming years, everything from acquisitions due diligence to site inspections to the overall tenant experience will be affected by this move toward the electronic, the firm says.
Moody’s estimates that U.S. banks will post another $77 billion in write-downs through the end of 2010 related to commercial real estate. Taking a lesson from history, trends in commercial real estate usually lag the residential sector. The housing market has just begun to show signs of improvement, which means the commercial side of the business still has a ways to go, but its impact will likely be a little more placid.
According to TheStreet.com, when the residential real estate market started to take a nosedive in 2007, it caught banks, homeowners, and investors all off guard, and even as it became clear that there were big subprime problems, few initially expected the destruction to last so long or bleed so far into more creditworthy borrowers. In the market, it’s all about expectations, the financial markets Web site says, and that means investors should be well-prepared for the long-anticipated commercial fallout.
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