The U.S. commercial real estate market is unlikely to recover before 2012, and office rents in New York and San Francisco may drop 20% through next year, a survey of property investors says.

Suburban office rents are likely to fall as much as 20%, and downtown office rents about 10%, according to the quarterly PricewaterhouseCoopers Korpacz Real Estate Investor Survey released Tuesday.

"The biggest problem is that commercial real estate lags what happens in the economy," Susan Smith, director of PricewaterhouseCoopers' real estate advisory service, said in an interview.

"Companies are looking for ways to cut costs," she said, and "many are continuing to reduce workers and are continuing to reduce their space needs."

Commercial property values in the United States have plummeted 36% since peaking in 2007, as mortgage losses forced banks to restrict lending.

This has caused sales volume to plunge as would-be buyers await defaults by investors who relied on debt to buy properties from 2005 to 2007, when prices were soaring.

This is the first time in the survey's 22 years that investors in most office markets say they expect values to decline, Smith said.

Potential commercial real estate buyers told Pricewaterhouse they expect a wave of foreclosures on debt-ridden property owners next year and are disappointed that more have not already happened.

Lenders are extending delinquent landlords' payment deadlines while replenishing their capital reserves in hopes that an economic recovery will boost property values and mitigate mortgage losses, she said.

"It's a very tricky game to play," Smith said.

If the U.S. economy does not improve, financial companies could be "left with very few alternatives," Smith said.

On the other hand, "if the banks are right, there is going to be only a very limited number of distressed-sale opportunities," she added.

The 115 realty firms in the survey said they expect prices to fall or stay the same for at least the next six months in all markets and building types.

Office rents could decline as much as 15% in Phoenix and 10% in Boston, Denver, Chicago, Los Angeles and San Diego.

Strip malls built around such big-box stores as Wal-Mart Stores Inc., Home Depot Inc. and Target Corp. could see rent declines of as much as 10%, and regional mall rents could fall 5%.

Investors are expecting rental apartments to lead a recovery starting next year and continuing through 2012, according to the survey.

A lack of construction means supply is likely to stay static while demand for rental housing coud rise due to immigration, retiring baby boomers and the transition of boomers' children from college to the work force, Smith said.

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