US Property Outlook

Having been an active investor in property around the US for the last decade I thought I would share some thoughts on the market based on my experience, feedback from clients, and a recent report from accountants PwC - the general conclusion is that the US commercial real estate faces a long, slow road to recovery that is more than a year away for most types of property, with Washington policy-makers increasingly pulling the strings that affect prices.

The recovery of commercial real estate is not expected to gain much traction until late 2011 or 2012, given current prospects for a lackluster economic revival in the United States and high unemployment, said the fourth-quarter Korpacz Real Estate Investor Survey.

Rental rates will continue to decline until strong, consistent job growth resumes, according to the survey. With $US1.4 trillion of commercial real estate debt maturing by the end of 2012, some property owners will not be able to survive the downturn. Problems related to refinancing that debt could further delay a recovery in the sector, the survey said.

More than 100 real estate investors were surveyed, representing the views of real estate investment trusts, pension funds, private equity firms and insurance and mortgage companies.

Eyes on Washington

Pricing in the industry will be more influenced by government and regulatory policy than by occupancy levels or rents, said Robert White, President of Real Capital Analytics.

Policy makers control what happens to commercial mortgages in default, White wrote in the report, and have encouraged loan modifications and extensions even in cases where loans are above a property's current value.

Tax policy, meanwhile, has made it easier for special servicers to negotiate with borrowers, a move meant to prevent a wave of maturity defaults and property fire sales. Keeping rates low and easing restrictions on foreign capital will also influence industry prospects.

Commercial mortgage-backed securities held about 42 percent of distressed loans, US banks 31 per cent and international banks another 13 per cent, at the end of November, Real Capital Analytics said.

Tough 2010

While the report did note some signs of a possible improvement in the economy, such as improving labor trends, it showed broad expectations for continued recession in 2010 across several property types.

Investors expect the office sector to remain in recession in 2010, with a rebound the following year. A more prominent recovery is not likely until 2012.

The retail real estate sector is expected to stage a modest recovery starting in 2012, though some markets - like Fort Lauderdale, Houston and Nashville - may improve earlier, according to the survey of investors in 28 markets.

The warehouse sector, which reflects the movement of goods, will remain in recession through 2010, with some properties recovering in 2011, investors said. The apartment sector is forecast to begin recovering in 2011 and 2012.

In the national suburban office market, investors said they expect property values for suburban office product to decline an average of 8.75 per cent, as rents decline and landlords struggle to maintain occupancy levels.

Owners of downtown office properties are expected to see little relief in the coming year, as they contend with lower rents, falling tenant demand and increased supply of subleased space. Demand for central business district (CBD) space typically lags the US economy.

Investors also expect national power centers, developments anchored by major chain stores, to be one of the worst investment prospects in 2010, as the economy affects both consumers and retailers.

Although there are signs of a recovery, 2010 is a good time to review your approach to the market - there could be good investments to snap up and a good time to improve the performance of your rental portfolio.

Good luck and happy investing for 2010!

Mike Bridges
http://www.propertyexpresscrm.com/