Expect Property Value Drops

From our sister publication, NREI.

“If credit is significantly constrained, we may see properties trading at a discount relative to their underlying worth,” Chandan says. “People who are going to be selling over the next 12 to 24 months are largely people who need an exit strategy.”

Chandan's remarks came during a gathering Wednesday of the Southeast chapter of the Real Estate Investment Advisory Council (REIAC), where nearly 300 members voted electronically on current economic topics, offering an instant snapshot of the developers and investors' concerns.

Nearly two-thirds of the investors —65% — predicted that commercial real estate values would drop over the next two years. More specifically, 51% said property values would drop 5% to 10% while 14% expected them to decrease by 10% to 20%. About one-third of respondents were more optimistic, saying values would rise slightly or stay the same.

An overwhelming number of the group, 82%, said the country already has entered a recession. Nearly half the voters, 49%, predicted that the slowdown would be mild with a quick rebound. Ominously, however, one-third said the slowdown “will prove deep and protracted.” Chandan, a panelist at the seminar along with Bret Wilkerson, CEO of Boston-based Property & Portfolio Research, agreed with the latter view.

More than half the group said it would be late 2009 — at least — before the economy gains momentum. The current climate of tightened credit for borrowers, a result of the subprime crisis that started in the residential sector, could prolong the nation's recovery. Credit issues now have moved from concern over the ability to obtain affordable mortgages to the widespread use of credit cards to finance mortgage debt in addition to consumer spending.

“The revolving credit issue is a significant one,” Chandan said. “A lot of people are writing checks from their credit cards to their mortgage companies.”

A strong majority, 58% of the gathering, called multifamily the strongest commercial real estate sector, and forecast that it would perform better than other sectors through 2010.

As for the sector most likely to perform the worst over the next two years, 42% cited retail, while 38% said it would be the office sector. Only 17% thought hospitality would perform the worst.

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