Report states commercial real estate may be approaching bottom

By Andy Feinour, Senior Vice President, Carter

April 1 (Atlanta) – A report released by Deloitte indicates the time to invest in real estate is coming sooner rather than later.

The reasons are obvious for anyone who has been paying attention during the last two years; declining real estate operations, debt maturity and credit access and stalled construction. In other words, real estate is in a slump, the prices are right and there is no new construction that will impact the investment.  

Feinour, Andy 2009The expectations of sellers and buyers are finally starting to converge, which will help facilitate transactions to finally occur.This will effectively define the bottom and enable all of us to begin to move forward. 

What does that mean for investors in Atlanta?A great deal, according to the Deloitte report, ‘Perspectives on Real Estate:Uncovering Opportunity in a Distressed Market,’ released last month.

Thereport states: “Though a handful of hospitality markets, including San Francisco and Atlanta,are expected to post positive room rate growth, the majority will need to waituntil 2011 for a return to profitability. Bright spots in the office marketinclude Washington, D.C., which hasbenefited from the federal government expansion, and New York,which has begun to turn around due to increased hiring at investment banks.Residential oversupply remains a problem across Miami, Atlanta, Phoenix and Las Vegas.”

According to the report, trends for commercial real estate over the nextnine to 18 months may include:

  • Declining real estateoperations. Driven by job losses and declining consumerspending, vacancies are up and rents are down, leading to decreasingvalues – especially in office and retail assets. An economicrecovery in 2010 could lead to an uptick in the job market and consumerspending, which may correlate in rising values spurred by greaterconfidence in future occupancy and rent increases.
  • Debt maturity and creditaccess. With an uptick in value drivers for commercial realestate potentially lagging the general economic recovery by three to sixmonths, owners and mortgage holders will likely continue to struggle withdebt maturity in 2010 and beyond, with an expected increase inforeclosures and deeds in lieu. Opportunistic investors, many who raisedsignificant capital for this purpose, are using foreclosed properties anddistressed debt as a strategic opportunity to make opportunisticacquisitions and expand their real estate portfolio. Key targetsapproached to capitalize on these investment opportunities are banks,mezzanine debt holders, commercial mortgage-backed securities (CMBS)special servicers and the Federal Deposit Insurance Corporation (FDIC).
  • Stalled construction. There will likely be almost no new construction activity in anyasset class in 2010, leading to historic low levels of new constructionwith excess capacity in almost every asset class.
  • Bottom out, then recover. Some real estate asset classes are expected to bottom out and thenstart to recover in 2010. Rent levels will begin to rise with job growthand increases in consumer spending and gross domestic product (GDP),although this will likely be a slow rise. Hospitality – which many believehas already bottomed out – and multi-family residential may be the firstto rebound because of the short term nature of their leases, withlonger-term leased assets like retail, office and industrial recoveringmore slowly. Single-family home prices seem to have solidified, althoughit could take years for home values to truly recover.
  • Where are the investors?Despite available capital, opportunistic investors have been waiting forthe market bottom, signaled by stronger employment and consumer spending. Publiccapital markets have shown increasing interest in commercial real estate,a trend that should continue in 2010 most notably via real estateinvestment trust initial public offerings (REIT IPOs) and secondaryofferings. The U.S.should see a significant influx of foreign capital from Asia (especially China and Korea), Germany and the Middle East, as wellas from domestic investors. Well capitalized REITs and funds will likelysee increased opportunities to make distressed acquisitions, bothgeographically and across property types.

 

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