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The ideal time to invest in commercial real estate is 2010 – that’s when commercial property prices will hit bottom, according to a recently published survey of industry experts, including investors, developers, lenders, brokers, and consultants.
The Emerging Trends in Real Estate 2010 study, released last week by PricewaterhouseCoopers LLP (PwC) and the Urban Land Institute (ULI), says commercial real estate (CRE) players predict vacancies to continue to increase and rents to decrease across all property sectors before the market hits bottom next year.
The consensus is that property values will ultimately drop 40 to 50 percent on average from 2007 market peaks, making 2010 and 2011 the opportune time for investors to buy at or near cyclical lows.
“Our report participants find that a sense of nervous euphoria is growing among liquid investors who can make all-cash purchases,” said Stephen Blank, ULI’s senior resident fellow for real estate finance.
The survey data also indicates that investors believe capital will slowly begin to flow back into commercial real estate markets by the end of 2010, led by all-cash investors.
Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers, explained further, “For 2010, our report finds that investors will need to time the cycle and only cash-buyers will benefit from the emerging opportunities. Equity investors will need to focus on quality assets and expect to hold for at least a five- to seven-year period during the recovery, allowing fundamentals to slowly improve.”
The research firm Real Capital Analytics, Inc. estimates that commercial real estate loans in default, foreclosure, or bankruptcy now total roughly $130 billion. By being selective on offers from both distressed sellers and banks that are clearing out bad loans and real estate owned portfolios, investors will score bargains on premium properties, according to the study.
Blank says the CRE property market recovery will likely begin to gain traction before 2012, and survey participants believe that the markets performing well before the crash should be the top-performers coming out of it, with investors continuing to favor global gateway markets on the East and West Coasts.
According to the survey, Washington, D.C. ranks number one as the “recession-proof” city. Value declines there have been less than other markets as employment is buffered by the federal government.
Long-term confidence holds for New York and Boston despite financial industry downsizing. West Coast gateways – San Francisco, Seattle and Los Angeles – have all suffered ratings declines, but remain among the survey’s top major markets. Texas markets also continue to show strength, according to survey participants.
As prices hit their floor, the PwC and ULI study predicts that lending will be conservative, expensive, and extended only to the most-favored banking relationships. Real estate investment trusts (REITs), private equity funds, and even refashioned mortgage REITs will start to provide loans to battered borrowers but at a steep price, the companies said in their report.
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