Urban Land Institute Says Commercial Real Estate Market to Find Bottom Next Year

Real estate experts expect financial and real estate markets to find the bottom in 2009, and flounder for much of 2010, according to a report issued by the Urban Land Institute. The report, which contains survey results from approximately700 real estate professionals, predicts that commercial real estate faces its worst year since the 1991-1992 industry depression, and projects properties will suffer price losses in the 15-20 percent range from their mid- 2007 peak.  Interviewees said that financial institutions will continue to be pressured into moving bad loans off balance sheets, using auctions to expedite the process. Investors will be discouraged until the “bloodletting” is over, the report stated. When that occurs, cash and low-leverage buyers will be “king”; surviving banks will impose strict lending guidelines; CMBS will revive, but in a more regulated form; and opportunity funds will need new investment models.  Survey respondents predicted that cap rates would increase on all property types, with warehouse industrial product rising the least at 42 basis points by December of 2009, and limited service hotels rising the most, at 73 basis points by that date.  In a conference call that revealed the details of the report, Stephen Blank, ULI Senior Resident Fellow for Real Estate Finance, said the CMBS market will likely have to undergo some major reforms before it will ramp up again.  “There will be greater due diligence required on behalf of the originator,” he said. “Also, there must be greater alignment of interest between the originator and the buyers.”  Financing for development will be particularly tough in 2009, the report predicted. “Many developers will be able to go on golf holidays,” Blank said.  The report, in its “Markets to Watch” segment, named Seattle and San Francisco as the number one and number two investment markets, while last year’s leader, New York City, fell to fifth as respondents expressed fears about the Wall Street implosion. Washington, D.C. finished third, while Los Angeles rounded out the top five.  Continued disruption in the housing market is benefiting the apartment market, which the report lists as the top buy of all real estate sectors, with moderate-income apartments in core urban markets near mass transit rated by the respondents as the best buy in that sector.  The report offered some advice, if not solace, for 2009. Some recommendations: investors should sit tight, as opportunities will surface at significant discounts; buy discounted loans; recapitalize distressed borrowers—invest in maturity defaults, construction/bridge loans, or take mezzanine positions and equity stakes in properties; and buy or hold multifamily; hold office; hold hotels; buy residential building lots, but be prepared to hold.