WASHINGTON, Oct. 21, 2008 (GLOBE NEWSWIRE) -- Real estate industry investors and professionals expect financial and real estate markets in the United States to bottom in 2009 and 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 the Emerging Trends in Real Estate(r) 2009 report, released today by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP.
"Commercial real estate faces its worst year since the wrenching 1991-1992 industry depression," conclude industry experts interviewed for the report, which projects losses of 15 percent to 20 percent in real estate values from the mid-2007 peak. "Only when property financing gets restructured will pricing recorrect so we can find the floor, and this transition could wipe out companies and people," says one respondent interviewed for the report.
Now in its 30th year, Emerging Trends is the oldest, most highly regarded annual industry outlook for the real estate and land use industry and includes interviews and survey responses from more than 600 leading real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants.
In general, interviewees believe that financial institutions will continue to be pressured into moving bad loans off balance sheets, using auctions to speed up the process. Investors will be discouraged until the "bloodletting" is over, states the report. 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 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 industry professionals, 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."
"The cyclical real estate markets always come back, and they will this time too, but not anytime soon," said Tim Conlon, partner and U.S. real estate sector leader, PricewaterhouseCoopers. "Commercial real estate was the last to leave the party, will feel the pain in 2009, and may be the last to recover. In the meantime, smart investors are going to hunker down and manage through these tough times. We expect to see patient, disciplined, long-term investors rewarded and return to a back to basics approach to property management, underwriting and deal structure."
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 report acknowledges that commercial markets will recover more quickly than most housing markets, and homebuilders may have to sell land tracts for "cents on the dollar" or face foreclosure on their holdings, adding to the already high rate of mortgage defaults and foreclosures.
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. However, Emerging Trends cautions, "The industry shouldn't blindly count on a restored well-spring to jump-start transactions and development. The dynamics of capital markets have changed dramatically."
Noted one respondent: "It's hunkering down time, where the initial winners will be companies that can out-lease and out-manage their competition."
Interviewees agreed that eventually, savvy investors will be able to cash in on the inevitable recovery, which some see occurring as early as 2010. "Money will be made on riding markets back to recovery and releasing properties, not on financing structures," finds the report.
Emerging Trends indicates that the following need to happen before a rebound can occur:
* Private real estate markets need to correct -- lenders must force
distressed owners to become motivated sellers.
* Debt capital needs to flow -- lenders will need to learn to deal
in a more stringent regulatory landscape. The commercial mortgage-
backed securities (CMBS) market must "reformulate."
* Regulators need to restore confidence in the securities market.
The government will insert itself into overseeing mortgage
securitization markets. Systemic overhaul promises more measured
debt flow.
* The economy needs to improve. Falling demand for space won't
affect real estate markets severely until 2009.
* The housing condition is no better and shows no signs of
recovering quickly. For lenders, the "subprime mess is the tip of
the iceberg." Stricter lending standards and the weak economy
will continue to drain the homebuyer market. "Forget the quick
fix!"
Suggestions for managing through 2009:
* Investors should sit tight. Opportunities will surface at
significant discounts.
* Buy discounted loans.
* Recap distressed borrowers -- invest in maturity defaults,
construction loans/bridge loans, or take mezzanine positions and
equity stakes in properties.
* Invest in publicly-held real estate investment trusts (REITs) -
they will lead the market's recovery.
* Focus on global pathway markets -- 24-hour coastal cities.
* Staff up asset managers, leasing pros and workout specialists.
Separate good assets from bad.
* Retrench on development and reorient to mixed-use and infill.
Higher-density residential with retail will gain favor in next
round of building.
* Go green -- cutting energy expenses is likely to be a priority.
* Buy or hold multi-family; hold office; hold hotels; buy
residential building lots, but be prepared to hold.
* Purchase distressed condos in urban areas near transit.
* Focus on neighborhood retail centers with strong grocery anchors
and chain drugstores.
Geographic Markets to Watch
In terms of investment prospects, Seattle and San Francisco top the list, beating New York City, which has traditionally ranked at the top of the list. For 2009, New York slips to fourth place, below third place Washington D.C. Los Angeles remains in fifth place, but suburban areas outside of that city, specifically the housing market in Riverside and Orange County, will suffer. Las Vegas and Phoenix get "blown out," while Florida markets are described as in "disarray." Markets in the Midwest continue to lose more ground; however, Chicago manages a "fair" ranking in the region-wide decline. Meanwhile, the relative position of Texas markets has improved due to the oil industry.
A snapshot of the top five markets:
Seattle boasts its "corporate giants," but the market braces for rising downtown office vacancies, now at 10 percent. Tepid job growth will flatten rental rates. Housing demand drops and prices will slip but stay above national averages. Interviewees rate the market a strong "buy" for apartments, and the "number-one buy" among industrials is the Puget Sound ports.
San Francisco offers a Pacific gateway and a high quality of life with a well-diversified economy. The city ranks first for development and homebuilding, and is a leading "buy" city for apartments and office. Even though housing prices are expected to decline, foreclosures should remain in check, the report notes.
Washington is the "ultimate hold market when the economy struggles." Downtown office vacancies should remain below 10 percent, and apartments lease "no matter what." The above-average employment outlook offers promise for the retail sector, the report says. Still, office vacancies continue to soar in Northern Virginia, and further declines in condominium and home prices can be expected.
New York takes a beating with the Wall Street "implosion" creating job losses and office vacancies. Hotels should continue to draw tourists with the weak dollar. Retail frenzy ends, but the wealthy keep Madison Avenue boutiques alive. With the condo/coop market at a "crest," developers "should worry about flagging buyer demand," the report notes.
Los Angeles downtown benefits from condo/apartment projects. "It's almost impossible to lose money on apartment investments if you have a five- or 10-year investment horizon," notes one respondent. Hotels benefit from global pathway location. One downside -- homebuilders in San Bernardino and Riverside continue to grapple with the housing collapse.
Rounding out the top ten markets to watch:
* Houston. Stays relatively strong as long as energy stays hot. It
makes the top ten for the first time since 1995. Office vacancies
drop to 10 percent, "a good buy opportunity," but apartments
soften. Cheap land results in cheap housing, and prices have not
gone up dramatically.
* Boston. Job outlook is more favorable than most cities, with
office space "tight" in the Financial District and the Back Bay
area. New "harborside hotels threaten older product."
* Denver. The state capital has a major federal government
presence, which should buffer job losses. Steady population
growth and broadening diversification of the industry keeps the
housing market stable. Mass transit should pay future dividends.
* Dallas. Compares favorably to other "hot-growth" markets.
Although office vacancies downtown are 20 percent or higher,
apartments do well, and developers keep building single-family
homes.
* Chicago. Apartments do well, but condos weaken as speculators
leave the market. Office vacancies are in the low teens, and
O'Hare International Airport keeps industrial space in
the "global pathway."
Among property sectors most promising for investment, apartments take top position in the report, with distribution/warehouse coming in second. Downtown office space is expected to outperform suburban markets. Retail development, notes the report, is generally near the bottom, but has farther to go, while the housing industry faces more foreclosures and no rebound in values for 2009.
A copy of Emerging Trends in Real Estate(r) 2009 is available at www.uli.org/emergingtrends or www.pwc.com/imre.
About the Urban Land Institute
The Urban Land Institute (www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has more than 40,000 members representing all aspects of land use and development disciplines.
About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 154,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
"PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.