U.S. commercial property prices are likely to hit bottom next year after falling more than 40% from their 2007 peaks, real estate executives said in a survey conducted by PricewaterhouseCoopers LLP.
Banks that have been reluctant to foreclose on commercial properties or restructure debt will start to do so as they build up reserve funds with government capital, respondents predicted.
Seized properties will become "highly attractive buying opportunities" for investors with cash, PricewaterhouseCoopers said Thursday in its annual "Emerging Trends in Real Estate" report.
"Amid all the doom and gloom, there's this one little caveat," said Susan Smith, director of PricewaterhouseCoopers's real estate advisory service. "It's going to be a very challenging ownership period, but if you have the cash and the dollars to do deals, you're going to do very, very well next year."
Commercial property sales should pick up in 2010, Smith said, after falling to their lowest level since the savings and loan crisis of the early 1990s.
The credit crisis has driven $138 billion worth of commercial properties into default, foreclosure or debt restructuring through September, according to the property research firm Real Capital Analytics Inc.
More than $250 billion in commercial mortgage debt will come due next year, followed by higher amounts in 2011 and 2012, the PricewaterhouseCoopers report showed.
About $16 billion of sales may take place this year, or 93% less than the peak year of 2007, Real Capital has projected.
Owners will have trouble refinancing because lenders are curtailing credit, and falling real estate values mean an increasing number of properties are worth less than the debt owed on them.
Investors called it the worst time to sell and the best time to buy properties in the survey's 31-year history. Buying opportunities for cash investors will probably continue into 2011 and possibly 2012, Smith said.
Survey respondents "hope and pray the government intervenes through some form of credit support for commercial properties to backstop all the loans coming due," the researchers wrote. "Otherwise values will drop further and postpone any chance of a real estate market recovery."
More than 88% of U.S. survey participants said they expected lending standards to be "very stringent."
Washington displaced Seattle as the top U.S. commercial property market, according to survey respondents. Almost 64% of interviewees said it's a good time to buy Washington office properties, while about 70% called apartment buildings in the nation's capital a "buy."
San Francisco was second in both categories, with 68% of those surveyed favoring apartments and 51% recommending offices there. New York offices were rated a "buy" by 49%, placing them third in the survey.
Markets such as Phoenix, Las Vegas and south Florida — where housing supply exceeds demand — ranked near the bottom, and ratings for Midwestern manufacturing cities such as Cleveland and Detroit reached new lows in the survey. Chicago, "the region's diversified 24-hour citadel, can't escape a chill from the regional downdraft," the researchers said.
The report is a joint venture with the Urban Land Institute, a Washington organization of real estate investors and developers, architects, engineers and academics. It's based on a survey of 710 individuals, 56% of whom are private real estate executives or developers.