Real estate industry experts expect financial and real estate markets in the United States to hit bottom in 2009, then 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® 2009 report, released in late October by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP.
Seattle was singled out as the top-ranked real estate investment market to watch. One partner from PricewaterhouseCoopers expects a rebound “but not anytime soon.” Patient, disciplined, long-term investors will be rewarded, he declared. “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 re-correct 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. The outlook is based in part on 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.
One silver lining: 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.
Best Advice for 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.
NWREporter February 2009
