Highlights from Emerging Trends in Real Estate® 2009
Real estate industry experts expect financial and real estate markets in the United States to bottom in 2009 and 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 today by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP.
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.
Distress in the housing market is benefiting the apartment market, which the report lists as the number-one “buy.” Moderate-income apartments in core urban markets near mass transit offer the best buy, a trend that carried over from the previous year.
The report acknowledges that commercial markets will recover more quickly than most housing markets, and homebuilders may have to sell land tracts for “cents on the dollar” or face foreclosure on their holdings, adding to the already high rate of mortgage defaults and foreclosures.
The main beneficiaries of the real estate downturn in the U.S. are cash-rich offshore buyers, whom the report predicted will continue to take advantage of the weak dollar, and will buy trophy properties in major 24-hour cities.
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 .
A snapshot of the top five markets:
- Seattle boasts its “corporate giants,” but the market braces for rising downtown office vacancies; now at 10 percent. Tepid job growth will flatten rental rates. Housing demand drops and prices will slip, but stay above national averages. Interviewees rate the market a strong “buy” for apartments, and the “number-one buy” among industrials is the Puget Sound ports.
- San Francisco offers a Pacific gateway and a high quality of life with a well-diversified economy. The city ranks first for development and homebuilding, and is a leading “buy” city for apartments and office. Even though housing prices are expected to decline, foreclosures should remain in check, the report notes.
- Washington is the “ultimate hold market when the economy struggles.” Downtown office vacancies should remain below 10 percent, and apartments lease “no matter what.” The above-average employment outlook offers promise for the retail sector, the report says. Still, office vacancies continue to soar in northern Virginia, and further declines in condominium and home prices can be expected.
- New York takes a beating with the Wall Street “implosion” creating job losses and office vacancies. Hotels should continue to draw tourists with the weak dollar. Retail frenzy ends, but the wealthy keep Madison Avenue boutiques alive. With the condo/coop market at a “crest,” developers “should worry about flagging buyer demand,” the report notes.
- Los Angeles downtown benefits from condo/apartment projects. “It’s almost impossible to lose money on apartment investments if you have a five- or 10-year investment horizon,” notes one respondent. Hotels benefit from global pathway location. One downside -- homebuilders in San Bernardino and Riverside continue to grapple with the housing collapse.
Commercial Real Estate Market to Hit Bottom Next Year, Finds Emerging Trends in Real Estate® 2009 Report from the Urban Land Institute and PricewaterhouseCoopers >>
The Emerging Trends in Real Estate® 2009 report will be available on October 29, 2008. Pre-order your copy now at the ULI Bookstore.