Commercial Real Estate: Ready to Tank

A new survey says the commercial real estate market is headed toward a bad year in 2009 and a lukewarm recovery in 2010

By Peter Coy

Commercial real estate has been strangely impervious to the housing crash, but its luck is about to run out. Economists and industry analysts say the recession and credit crunch pretty much ensure a bad year for commercial real estate in 2009, and at best a tepid recovery in 2010.

Any doubt about insiders' gloominess was erased on Oct. 21, when the Urban Land Institute and PricewaterhouseCoopers issued the 30th annual Emerging Trends report, which is based on surveys or interviews with more than 700 investors, developers, lenders, and other experts.

The report predicts that returns for private equity investors are likely to be negative in 2009 for the first time since the sector's severe downturn in 1991-92. In 2010, the experts interviewed for the study predict "a slow recovery, hampered by risk aversion, constricted financing sources, and a weakened economy."

Apartments Could Be a Bright Spot

The interviewees say that investors should sit on their cash until prices fall more, possibly wading in around mid-2009. For developers, they say "urban infill" projects should be more attractive than exurban ones, and apartment developments could be a relatively bright spot.

"Global pathway markets" should be best for investors, say the Emerging Trends interviewees. "The favored 24-hour coastal cities—D.C., San Francisco, New York, L.A., Boston, and Seattle—will hold value better and bounce back more quickly," the report says. "Core players and offshore investors gravitate to these elite business and cultural centers linked directly to Asia and Europe commercial capitals. Hot-growth Texas markets—Houston and Dallas—show temporary strength as long as oil prices stay high."

The Best and the Worst

Here's a list of the best and worst U.S. "markets to watch" among the top 50 metro areas for commercial and multifamily investment, according to the survey of real estate insiders.

BEST
Seattle
San Francisco
Washington, D.C.
New York
Los Angeles
Houston
San Jose
Austin, Tex.
Boston
Denver

WORST
Detroit
Cleveland
New Orleans
Milwaukee
Columbus, Ohio
Pittsburgh
Las Vegas
Memphis
Cincinnati
Providence

In other commercial real estate news on Oct. 21, Moody's Investors Service (MCO) announced that commercial real estate prices fell 0.1% from July to August. In a statement, Moody's Managing Director Nick Levidy said, "Although we have not seen a significant decline in prices since June, we believe it is premature to call a bottom at this time." He added: "Rather, the low transaction volume suggests that the flattening of prices is more likely the result of loss avoidance on the part of sellers."

Coy is BusinessWeek's Economics editor.