NEW YORK - U.S. commercial properties getting clobbered today are likely to hit bottom in 2010 then claw back a third or more of their lost valuations over three years, according to a report by Maximus Advisors.
Falling rents, rising vacancies and defaults make a rebound in the $6 trillion market hard to fathom, but the estimates are key for investors that have been hoarding cash in anticipation of profit-rich, distressed opportunities.
New investors, including Barry Sternlicht's Starwood Property Trust, have been slow to spend their money amid a widespread belief the market has not seen its bottom and better opportunities will emerge. Starwood, which in August raised $950 million, still has about $775 million in cash, it said on a conference call last week.
Maximus, led by former Deutsche Bank global real estate research head Peter Muoio, in its recent report said apartment, retail and office buildings would get a recovery pop of more than 16 percent after 2010.
With the landscape of the decline for both fundamentals and valuations becoming clearer ... it is an opportune time to shift focus to the next stage of the U.S. real estate cycle -- the shape of early recovery, said analysts at Maximus, a unit of real estate finance and investment firm CWCapital.
However, the bounce will likely be muted compared with gains seen after past downturns, due to the damage to financial institutions and credit markets that have provided significant support, they said. In the past, office and retail building values have gained some 30 percent in the first three years of rebound, while apartments have risen 20 percent, it said.
For now, outlooks remain dire for revenue-producing real estate as unemployment rises and consumer demand stagnates.
Moody's Investors Service in a separate report on Monday downgraded its view on commercial property price declines to between 45 percent and 55 percent from their 2007 peak. By its measure, commercial property prices are down 42.9 percent from the top.
Maximus expects prices will fall by a similar amount, which for investors waiting to pounce means that the market has seen 75 percent to 90 percent of its expected drop in valuation.
The rebound in 2011 will be led by apartment buildings, which will benefit from a jump in household formation as the economy recovers, tight lending standards and since the leases are being reset faster than on offices, said Maximus analysts.
For offices, longer leases, the lag between economic recovery and hiring mean that vacancies will stay higher for a longer period, Maximus analysts said. The valuation pop will also be held back in retail as consumers, feeling less wealthy, restrain spending and save more, they added.
Apartment rent declines have already fallen 2.4 percent, or 51 percent of a total expected drop of 4.7 percent, the Maximus report said. By contrast, retail and office rents declines are just 33 percent and 34 percent through the predicted declines of 10 percent and 20 percent, it said.
Some investors are already chasing yield in real estate but concessions made by landlords on rents will pinch returns of the properties, Sternlicht said on the Starwood call.
Infusions of cash from investors may themselves help valuations return to levels of mid-2009, but the rebound will later depend on the slow process of rebuilding cash flows, Moody's said in its report.
Folks are sitting there trying to time the bottom, Nick Levidy, a managing director at Moody's, said in an interview. Nobody right now wants to try to catch a falling knife.
(Editing by Andrew Hay)