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CRE Recovery 'in Early 2011'

A recent report puts some positive light into the future of the commercial market, contrary to some 2009 predictions that commercial real estate asset deterioration represented the next big crisis waiting to happen. The 2010 Real Estate Forecast of Grubb & Ellis Co. Santa Ana, Cal., indicates that 2010 commercial real estate fundamentals will decline more slowly than in 2009, with most property types reaching bottom near the end of the year and beginning a slow recovery starting in 2011.

"The national economy has begun a slow and cautious recovery, but the labor market, which often lags the broader economy, will turn around only gradually with sustained improvement unlikely before the second half of 2010. Because commercial real estate lags the labor market, it still has a ways to go before reaching its own low point," said Bob Bach, senior vice president, chief economist of Grubb & Ellis. "The good news is that the freefall we saw in 2009 is over and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again."

The company said the investment market, which saw transaction volume maintain artificially low levels in 2009 as banks, CMBS servicers and other lenders delayed working through distressed assets, will start to see some of these assets finally come to market in 2010, prompting an increase in sales volume of 20% to 30% over 2009 levels. Prices, already down 40% from their peak in October 2007, may decline another 10% to 20% in order to meet buyers' expectations.

"Many have called commercial real estate 'the next shoe to drop,' but that's really an exaggeration," said Mr. Bach.

"It implies that commercial real estate could wreak damage on the financial system equivalent to the subprime residential mortgage losses, which is highly unlikely because the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages. Nevertheless, losses will mount over the next several years. If banks aren't lending because they're coping with losses in their real estate portfolios, this could impede the economic recovery."

Overall, the fact that banks likely will begin writing off their losses on distressed assets in 2010 means that the capital accumulating on the sidelines will start being deployed, and highly leveraged buildings, many without the capital necessary to attract tenants, will transfer to new ownership, removing what was a major impediment to recovery in the investment market, according to Grubb & Ellis.