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By John Scott Trotter and Brian Purcell
Real estate professionals turned out on November 19th to see the annual presentation of Emerging Trends in Real Estate® 2010, the annual trend and forecast publication assembled by the Urban Land Institute (ULI) in partnership with PricewaterhouseCoopers. Stephen Blank, ULI’s Senior Resident Fellow of Finance, presented the findings of the 31st edition of Emerging Trends which are primary driven by a survey of over 900 industry executives.
First the bad news and there was plenty of it. As the real estate capital markets ground to a halt, property values have fallen 40 to 50 percent since the highs of 2007. A quick turnaround is unlikely as the property sector will continue to suffer from capital constraints, distressed pricing and the poor underlying economic factors such as high unemployment, moribund growth prospects and an absence of consumer confidence. The elephant in the room as it relates to real estate pricing is how banks and other lenders will handle the pending maturity issues from aggressively underwritten deals at the peak of the market – “extend and pretend” is the current mantra, likely pushing out any near-term price discovery from foreclosures. Cap rate expansion is expected to continue across property types. Development will be on hold near-term with limited financing availability.
Despite mostly negative predications about property fundamentals over the next two years, there were faint hints of optimism. The coming years are anticipated to be a generational buying opportunity for investors who can pay all cash, including public REITs and other institutional players with access to capital. Superior returns are available for investors that are able to play “the timing game” and capitalize on distressed pricing. Outside of those liquid investors fortunate enough to avoid the balance sheet woes of the current downturn, there doesn’t appear to be any rapid turnaround in sight. Very few refinancing options exist with the lack of a securitized market, and debt for new acquisitions remains scarce with new deals finding onerous underwriting standards, at lower leverage, while seeking more borrower accountability (recourse). Blank went on to offer an overview of each region, commenting on the “fall from grace” suffered by the Southeast. Charlotte specifically retained a “yellow light” ranking. The Queen City isn’t overbuilt, and we continue to witness a population increase specifically with young professionals, but institutional capital is hesitant to invest with so much uncertainty in financial services sector.
Commenting briefly on each property sector, multi-family housing is the darling of this year, with “echo-boomer” demographics underpinning a quick recovery. Hotel properties may also benefit from a quick improvement as companies restore currently non-existent travel budgets. Retail will continue to struggle as a potential jobless recovery finds consumers choosing to save what little disposable income they have. Office and Industrial properties will remain challenged, with dormant job growth and longer leases impeding the ability to participate a recovery.
The rest of the panel offered brief remarks on their area of expertise. Larry Brown, co-founder of Allbridge Capital, alluded to new capital raises from Deutsche Bank and Apollo, but cautioned that the “new market” will remain challenging for any players searching for a lender. He added that at some point bankers will start to lend on core assets, potentially being the catalyst to open the frozen debt markets. Andrew Hede, a restructuring specialist with Alvarez & Marsal and current Chief Executive Officer and Chief Restructuring Officer of Crescent Resources offered an overview of Crescent’s activities, indicating that Crescent is likely emerge from bankruptcy early in 2010.
The most optimism of the morning was projected by the closing panel member, Dr. Steven Ott, John Crosland, Sr. Distinguished Professor of Real Estate at the University of North Carolina at Charlotte. With statistical evidence aggregated from multiple indices and industry reports, Ott predicted that values had hit bottom in most property sectors, and others were extremely close to the bottom. He made an argument that returns in the real estate sector should be very healthy in the coming years due to the current spread between Treasuries and cap rates, as well as rebounding GDP growth, which by historical measures, has been followed by increasing property values.
Below are photographs from the Emerging Trends event. For larger versions, click on the thumbnails.