No "Knight" to the Rescue, but Reasons to Be Optimistic

May 25, 2009
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As investors, lenders, and borrowers look for a timeline to real estate recovery, they shouldn’t expect a “white knight to the rescue.” This reality check was presented by a panel in capital markets and valuation of commercial properties at the Counselors of Real Estate (CRE) 2009 midyear meetings.

Despite prevailing statistics showing the U.S. and countries around the world experiencing overall declines in both the economy and real estate value, optimism for the future emerged as a watchword in multiple sessions featured at this conference.

Capital markets and valuation panelists concurred that declines in values are expected to average in the range of 30 to 40 percent before recovery, and that today the market has seen only a 10 to 20 percent decline in published data. Transaction volumes are expected to remain low until the spread between asking price and bids tightens and credit availability improves. Because the economic slowdown is global, Woody Heller, executive managing director and group head, Capital Transactions Group at Studley, Inc., said that foreign investors are being cautious, distracted by economic issues at home, which is why commercial property brokers should not expect help from abroad.

Valuation issues are affecting more than commercial property sales, added Brian Corcoran, executive vice president at Cushman & Wakefield. One example he used to illustrate the effect of declining value on the office sector showed that while value of one Park Avenue building in New York City dropped over 30 percent since June 2007, office space leases—historically providing income from escalating rents—have dropped to near zero percent increase expectations for the new several years, and only a 3 percent increase thereafter.

Several panelists suggested optimism fueled by the difference between the current economic cycle and past corrections in the commercial property sector. As supply and demand were close to equilibrium and construction pipelines were “less full” than in prior cycles, panelists predicted that when capital flows resume to the commercial sector, recovery will be quicker than past real estate recoveries. The only remaining question left unanswered was when.