ULI’s Emerging Trends Report Predicts Commercial Real Estate Market to Hit Bottom in 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, presented today by ULI Atlanta.

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 recorrect 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 and includes 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.

“The cyclical real estate markets always comes back, and they will this time too, but not anytime soon,” said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers.

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.

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.

Emerging Trends says the housing market condition shows no signs of quickly recovering. For lenders, the “subprime mess is the tip of the iceberg.” Stricter lending standards and the weak economy will continue to drain the homebuyer market. “Forget the quick fix,” says the report.

The Urban Land Institute is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has more than 40,000 members representing all aspects of land use and development disciplines.