National Forecast Predict Bleak 2009 for Commercial Real Estate
Posted: Nov 06, 2008
By: Burl Gilyard
Finance and Commerce
A new national study of the commercial real estate industry forecasts that the market will bottom out in 2009 – and pretty much stay there for some time to come.
Emerging Trends in Real Estate 2009, from the Washington D.C.-based Urban Land Institute and PricewaterhouseCoopers LLP, says that commercial real estate will “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.”
Mark Reiling, president of Minneapolis-based Towle Properties and a principal with Colliers Turley Martin Tucker, thinks that those projections are right on the money.
Any recovery, Reiling said, is “going to take time. The wild card in that outlook is: where are interest rates?” Reiling doesn’t expect “meaningful recovery” for commercial real estate until 2011.
Bill Wardwell, executive vice president for Minnetonka-based Welsh Cos., generally agrees with the assessment and expects a tough market for the next 18 months.
In the current credit climate, property sales are particularly slow as owners as potential buyers often have vastly different ideas about value.
“Absolutely, the investor market is upside down. No one knows what the right price is anymore,” Wardwell said.
Wardwell said that the investment sales business at Welsh is down more that 60 percent this year.
The Emerging Trends report finds that “real estate value losses will average 15 to 20 percent off mid-2007 peaks, and could be more severe for lesser-quality commercial properties in secondary and tertiary locations.”
Wardwell said that for now, the property leasing business has held up fairly well for Welsh.
“The rest of our traditional brokerage lines actually operating fairly well,” Wardwell said. “Our concern would be retail.”
But Wardwell notes that on the current climate, it’s tough to make definitive predictions.
“None of us know really what ’09 is going to be yet,” Wardwell said. “It’s probably going to be a tough ’09 and it’s probably going to be into 2010 we see some meaningful recovery.”
Viewed from any angle, the commercial real estate market is in tough shape. Investment sales are down and property leasing is sluggish across the board in office, industrial and retail. Many brokers report that doing deals is taking longer as clients delay decisions or spend more time haggling over the finer points of and agreement. Credit markets have tightened, making it tougher to finance or refinance deals.
The Emerging Trends report predicts that “commercial real estate faces its worst year since the wrenching 1991-92 industry depression.”
But as tough as times may be today, there’s also some consensus that it’s not as bleak as the industry saw in the early 1990s.
“I would say it was a commercial real estate depression in those days,” said Whitney Peyton, senior managing director for the local office of CB Richard Ellis.
“We were in that slump from ’90 to ’92, basically. It took us until ’95 to get out,” Reiling said.
The Emerging Trends report offers a sobering assessment for the year ahead: “In 2009, expected total real estate private equity investment returns will likely register in negative territory for the first time in nearly two decades.”
Noting the cyclical nature of real estate, the report notes: “Indeed, the market always comes back, just now in 2009.”
Yet industry veterans also take the long view of the real estate market. Yes, the business is in rough patch, they’ll say, but it won’t last forever. Real Estate remains a cyclical business.
“My general position is I don’t think it’s quite as bad as people might tend to think. I don’t think it’s ever quite as bad as people make it out to be,” said Clint Miller, regional manager for New York-based Cushman & Wakefield. “I believe that the recovery will come quicker than you would think.”
Jeff Eaton, president of Bloomington-based NorthMarq Real Estate Services, said that while today’s market may look similar to the early ’90s on the surface, it’s different in many key respects.
“Some of the symptoms today are similar, but the underlying causes are very different. In the past, we generally caused our own problems. There didn’t use to be the discipline in the industry. Oftentimes, we oversupplied the market and created the problems with the fundamentals – the imbalance between supply and demand,” Eaton said.
“Our underlying fundamentals continue to be solid. We’ve had this credit crisis and this related economic slowdown that has kind of surprised everybody,” Eaton said. “The current vacancies are relatively low compared to that (early ’90s) period. Property owners are generally in better shape to weather a downturn. Rents should hold up relatively better than they did before.”
Even so, Eaton acknowledges that there won’t be any quick turnarounds.
“Our forecast is for soft demand through ’09 – ’09 will be a tough year,” Eaton said. “It’s just hard to imagine that we can pull out of this quickly enough to make ’09 a decent year.”
