Report Cites CRE Buying Opportunities, If Firms Have Cash

The next 24 months offer “significant opportunities” for bargain hunting investors to pick up commercial real estate properties at or near their cyclical lows, according to the latest Emerging Trends in Real Estate report.

Scavengers who are “patient, daring and selective could score generational bargains on premium properties from both distressed sellers and banks that are clearing out unwanted bad loan and real estate-owned portfolios,” said Stephen Blank, a senior resident fellow at the Urban Land Institute, which produced the report with PricewaterhouseCoopers.

“It will be a very poor year to sell, but it will be a monumental opportunity to buy — if you have the cash,” Mr. Blank said at a press briefing during ULI’s annual fall meeting in San Francisco where the report was released earlier this month. But even the best capitalized and most savvy bottom feeders could be leery of a market in which the Emerging Trends survey predicts that vacancies will continue to increase and rents will continue to fall across all property types.

The study indicates that the income-producing property sector will hit bottom sometime next year. By then, values will be off 40%-50% from their mid-2007 peak. But once the recovery begins, it will be slow going, Mr. Blank said.

“Once the property market recovery begins and gains traction — likely before 2012 — any rebound could be restrained by a lackluster economy and rising interest rates,” he said.

Now in its 31st year, Emerging Trends is the industry’s longest running, continually published forecast. This year’s 80-page document is based on interviews and surveys of some 900 industry leaders, the most participants ever, said author Jonathan Miller.

The “mostly doom and gloom” study says the downturn in commercial real estate will be worse than in the 1990s, and foreclosures, give-backs and workouts can be expected to surge.

Capital will start trickling back into the sector, but “not until the markets sense a bottom,” said Mr. Miller. “And they don’t see a bottom until sometime next year.”

According to the report, whatever lending there is will be conservative, expensive and extended only to the most favored banking relationships.

Real estate investment trusts, private equity funds and even “refashioned” mortgage REITS can be expected to provide funding to battered borrowers — but at a steep price.

The 900 respondents expect multifamily housing to lead the market back from the dark side, with other asset classes following on a slow upward trajectory.

Despite record vacancies, the apartment and industrial/distribution sectors are rated as the best investment bets, with the hotel, retail and office sectors not even ranked as “fair.”

But respondents don’t like any of the five sectors when it comes to development opportunities. “Prospects (for development) are dismal across all property sectors,” Mr. Miller said. “We really don’t need anything new.”

The survey participants aren’t bullish on any particular geographic markets, either, though Washington and San Francisco are expected to bounce back more quickly than any of the other so-called top 10 cities — Boston, New York, Houston, Seattle, Denver, Dallas, Los Angeles and San Diego.