Pessimistic outlook for US commercial real estate

It could take a generation for the US commerical property market to return to the kinds of deals seen during the boom years of 2005 to 2007, according to analysts.

The prediction comes from real estate services company Jones Lang LaSalle whose latest analysis also shows that US commercial real estate sales fell 80% in the first half of 2009 compared with the same period a year earlier, and down an astonishing 93% from the peak in the first half of 2007.

The firm’s US Mid-Year Capital Markets bulletin shows that sales totalled $16 billion in the first half of this year compared with a peak of $231.4 billion in the first half of 2007. It also revealed that sales in the second quarter of $5.2 billion were the lowest on record.

From the peak of the market to the end of the second quarter in 2009, office asking rents fell on average 10 to 25%, office leasing was down 25 to 50% and commercial real estate prices fell 30 to 55%, according to the report.

The credit crisis, which accelerated at the end of last year, essentially shut down mortgage lending and other loans critical for real estate sales and refinancing, analysts point out. Although lending to selected borrowers has resumed somewhat, the US recession has pounded rents and occupancy rates.

‘It is unlikely that any true debt liquidity will return to the market until the middle of 2010 at the earliest,’ said Kenneth Rudy, president of Jones Lang LaSalle’s Capital Markets practice.

Prices for office buildings are not expected to begin to recover until at least 2012 because commercial real estate performance, which is based on job growth, lags the economy. The retail and lodging markets also will need additional time to recover as they depend on consumer spending and business travel.

Jones Lang LaSalle predicts that US investors will slowly begin to return to the market by the middle of  2010, though a return to the boom years of 2005 through 2007 will take a generation or longer.

Instead of $231 billion a year in deals, US commercial real estate sales are likely to hover around $100 million on average for the first several years of the next decade, the report concludes.

So even as the housing market starts to show signs of recovery, fortunes for commercial real estate are looking increasingly grim. The rate at which property owners are defaulting on loans is climbing at an unparalleled pace. Many banks are stuck with shopping malls, hotels and offices buildings they've repossessed and can’t sell.
‘The bottom line is defaults are exploding. It’s going to be worse than in the early 1990s. It’s terrible,’ said Richard Parkus, an analyst with Deutsche Bank.
The National Association of Realtors is also pessimistic and said a rebound isn’t likely until the second half of next year. And research firm Reis Inc says that defaults and late payments on commercial mortgage-backed securities may surpass 7% by the end of the year.

‘We haven’t seen the end of these delinquencies and defaults,’ said Edward Leamer, a senior economist at the University of California, Los Angeles, who added that there is about $3.5 trillion worth of commercial real estate loans held by banks, or tied up in commercial mortgage-backed securities or held by other institutions