Tuesday, March 24, 2009

Journey to the Bottom: Commercial Outlook 2009

The pundits at Deutsche Bank forecast that 2009 will be a transitional year for the commercial real estate market.

Along with the overall economy, the real estate investment market experienced a dramatic fall in the past year.

Following several years of outsized double-digit annual returns, pricing for real estate achieved unsustainably high pricing levels in 2007, ruled by highly available and inexpensive debt. Research estimates that values have fallen by 30 percent or more since the 2007 peak.

There is a silver lining to this dark cloud: outstanding properties at low prices.

Exceptionally high quality properties are expected to be available at historically low pricing.

Acquisitions in the coming year would be in advance of an economic and property market recovery, providing the potential for attractive long-term returns.

Apartment and Industrial property fundamentals are superior to office and retail investments.

Apartments, particularly in supply-constrained long-term growth markets, should be favored in the medium-term given a relatively early forecast recovery.

[Apartment] markets with the strongest prospects, in spite of some near-term pain, are Washington, DC, Baltimore, San Francisco, Seattle, San Jose, New York, San Diego and Los Angeles.

Research projects a remarkably strong recovery for the apartments between 2011 and 2015, possibly with the strongest effective rent gains in history.

In spite of near-term declines, [industrial] markets with the most favorable outlook include Los Angeles, San Jose, Seattle, Austin, Miami, Portland, New York and Orange County.

As Los Angeles emerges from the economic doldrums, investors in apartment and industrial properties should see attractive returns. The current environment, though credit may be tight and uncertainty hangs in the air, should present the best commercial buying climate in years.

[Source, RREEF Research “2009 U.S. Real Estate Investment Outlook and Market Perspective]