A very lengthy read, nonetheless it is an excellent discussion of the current state of residential and commercial real estate and the prognosis going forward for these asset classes, some excerpts below.
Emerging Trends in Real Estate 2010
After more than a year spent in suspended animation lagging already shattered housing markets, the commercial real estate industry hits bottom in 2010, suffering a surge of painful writedowns, defaults, and workouts. Massive government infusions finally build up loss reserves in financial institutions to levels allowing them to foreclose or strike deals with many overleveraged borrowers. In turn, banks will start to dispose of real estate owned, and government regulators will package and sell more bad loans and real estate assets acquired in takeovers of increasing numbers of failed community and regional banks. Transaction markets will begin to thaw and value declines ultimately will average more than 40 percent off mid-2007 pricing peaks. These property market reversals likely will be the worst registered since the Great Depression, eclipsing the industry debacle of the early 1990s.
In a classic timing play, investors with cash should be poised to take advantage of highly attractive buying opportunities at cyclical lows. Stressed owners, meanwhile, gird to hold on if possible and try to maximize property cash flows by focusing on asset management and leasing strategies in a decidedly tenants’ market. Emerging Trends surveys indicate that 2010 will be the worst time for investors to sell properties in the report’s 30-year history, but will offer a much-improving environment to buy (with cash).
Debt markets will remain severely compromised—resuscitated banks will increase lending slowly, employing strict underwriting standards and requiring significant equity stakes from borrowers. Moribund CMBS markets remain entangled in complex workouts of failed multitranched structures with mounting levels of troubled loans maturing through 2015. Restoring confidence in a revamped CMBS model becomes a major priority for the government and financial industry, but a quick fix is unlikely.
A lackluster economic recovery characterized by problematic job growth will hamper the pace of any real estate market resurgence, which probably cannot gain much traction until late 2011 or 2012. In the meantime, rents and occupancies will continue to fall well into 2010, savaging the prospects of weakened owners struggling with financing issues.
Retail and office properties take the biggest hits—debt-burdened consumers continue to rein in shopping and companies delay rehiring while looking to shave occupancy costs and improve productivity.
Developers go on enforced holidays. Commercial property sectors generally avoided overbuilding, but slack demand pushes up vacancies and many new projects can’t hope to meet leasing projections or debt-service obligations. Values sink well below replacement cost and any construction loans will be extremely expensive to negotiate. Development doesn’t pencil out when investors can buy existing real estate in the bargain basement.
Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging.
Sandwiched between mammoth value busts—the early-1990s industry depression and today’s “even worse” debacle—an unprecedented boom in real estate values produced huge gains for investors who cashed out early enough and used leverage wisely. But later entrants were savaged, especially when they overborrowed. “Those who play the cycle wrong lose every time,” says a leading researcher. “Asset allocation analysis is great for looking at history, but can’t stand up to the cycle.”
Source:
Emerging Trends in Real Estate 2010
Urban Land Institute and PricewaterhouseCoopers
