Opportunity for Commercial Real Estate Investors to Buy at Cyclical Lows

Commercial real estate investors and professionals remain decidedly negative, colored by distress over prospects for an extended period of anemic demand and costly de-leveraging, according to respondents of the Emerging Trends in Real Estate 2010 report, released by PricewaterhouseCoopers LLP and the Urban Land Institute.

Survey respondents predict that commercial real estate vacancies will continue to increase and rents will decrease across all property sectors before the market hits bottom in 2010, and project value declines of 40 percent to 50 percent off 2007 market peaks. Survey participants also believe that 2010 and 2011 will present generational opportunities 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 Banks, ULI senior resident fellow for real estate finance. “Those that are patient, daring, and selective could score generational bargains on premium properties from both distressed sellers and banks that are clearing out unwanted bad loan and real estate-owned portfolios. However, once the property market recovery begins and gains traction—likely before 2012—any rebound could be restrained by a lackluster economy and rising interest rates.”

In its prognostication for commercial real estate investors, the Emerging Trends report also offered the following investor best bets for 2010, which include:

• Deal with cash—the only way to operate and take advantage of emerging opportunities.
• Be patient—economic uncertainty is sure to hamper the recovery and absence of ready refinancing in debt markets.
• Focus on quality and be selective—seek Class A properties with debt maturity in places like New York, San Francisco, and Washington, D.C.
• Stick to global pathways where recovery will happen more quickly.
• Implement asset management triage—in other words, focus capital and resources on retaining and attracting tenants in properties with better long-term value.