Distressed Investors Still on Sidelines as Commercial Real Estate Decline Continues

Investors anticipate further deterioration in the underlying fundamentals of the commercial real estate industry through the remainder of 2009 and into 2010 as investors remain on the sidelines, a new survey shows.

Those seeking to acquire quality assets at distressed prices are hoping that expected near-term defaults and looming due dates on commercial mortgage-backed securities will jump-start buying opportunities that so far have been absent, according to the new PricewaterhouseCoopers (PwC) Korpacz Real Estate Investors Survey.

Investors are also looking to the 2012 due date for $153 billion of CMBS loans to spur buying opportunities. Since commercial banks account for a much greater percentage of the total looming debt, however, they could provide distressed sales sooner than 2012.

Separately, research firm Real Capital Analytics forecast that commercial-property sales in the U.S. this year will fall to the lowest level in almost two decades as the industry experiences its worst slump since the Savings and Loan crisis of the early 1990s.

The firm forecast that only about $16 billion of office transactions will be completed by year-end, Bloomberg News reported. Firm officials said that may be the lowest volume since at least 1991.

The PwC Korpacz survey found that the majority of the commercial real estate industry is expected to remain in recession through 2011. While an industry-wide recovery is not expected to begin until 2012, the pace of the recovery will vary for each property sector, as well as across individual geographies.
In the industrial and office sectors, a more pronounced recovery is expected to materialize in 2011, but is not expected to dominate these sectors until 2012. In the retail sector, the recession phase of the cycle is expected to linger through 2011, giving way to a slight recovery in 2012.

In contrast, the U.S. multifamily sector is expected to lead the industry out of the recession as its recovery starts to take hold in 2010 and continues through 2012.

So far, the de-leveraging of the commercial real estate industry has disappointed many investors, said the PwC analysts.

“Investors seem surprised at the lack of quality buying opportunities, given the problems in the financial markets and the continued weakening of the industry’s fundamentals,” said Susan Smith, editor-in-chief of the survey. “Some investors sense that near-term defaults with commercial banks will allow them to acquire quality.

Assets at steep discounts, as banks may no longer be able to continue to ‘pretend and extend’ troubled loans and would be forced to place assets up for sale.”