Domestically and globally, 2010 will be a transitional year rather than a turning point for commercial real estate recovery, according to ING Clarion. In a recent media event at the company's offices at 230 Park Ave. in New York City, David Lynn, head of US research and investment strategy, said recovery will be "a gradual process, not a crescendo like the early 1990s."
In fact, late this year, the recovery will enter into the third phase of what Lynn described as a four-phase process, as lenders begin selling in earnest. Phase four, in which an improving domestic economy and stronger fundamentals lead to rising income and property values, isn't likely to occur until 2012 or 2013 at the earliest.
Until then, Lynn said, with capital still on the sidelines and supply well below historic averages, it's a good time for investors to edge back into the game. "When the whole world recognizes a bottom, it's no longer a bottom," he said.
Noting that the volume of distressed assets grew by 557% in the past 12 months, Lynn also charted the upward progress of commercial real estate loans maturing in the next few years. This year, $306 billion will come due, next year, it will be $320 billion. In 2011, that total is predicted to rise to $370 billion, and in 2012 $420 billion of loans will mature.
Further giving rise to distress-and buying opportunities-will be more bank failures. This year, about 130 financial institutions have gone under, and while the body count will not reach the nearly 3,000 that amassed during the S&L crisis, Lynn said we'll see failures "in the high hundreds" this time, mostly small and regional banks.
While distress headed Lynn's list of opportunities in the current market, it's by no means the only one he sees. Others include originating mezzanine debt and preferred equity and making acquisitions from weakened owners. He noted that it's still possible to "do fairly well in a poor economy" with the right market location and property selection.
Tim Bellman, global head of research and strategy at parent organization ING Real Estate Investment Management, suggested that recovery worldwide is "on the launching pad." That being said, Bellman noted most markets will not return to 2007 -level capital values by '13. Nor will we see a return to peak employment levels for at least 60 months, Bellman said that in each recession since 1974, jobs recovery has taken longer.
For the next couple of years, Bellman said, investors globally will overweight retail and industrial properties. In the Americas, retail assets now offer the largest spread over government bonds, while industrial returns will offer the largest spread in the Americas and France by '10 or '11. Worldwide, the office sector will not catch up until at least' 11, except in Japan.While they're bullish on industrial and retail generally, investors will also overweight American buying opportunities, Bellman said. That's because they'll be likely to offer total returns of200 to 400 basis points over government bonds.
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