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Investors, Developers Divided on Investment Outlook for ’09

Commercial real estate investors and developers appear divided as to whether they will increase or reduce their overall investment activity this year compared to last, according to a recent survey by real estate services firm Jones Lang LaSalle. While slightly less than a third (30%) of those surveyed predict a drop of zero to 30% in their investment spending, more than a third (37%) of respondents say their investment activity will increase by 30% over last year.

The Chicago-based company, which conducts cross-sector surveys each spring and fall, questioned property owners and representatives of development and professional services firms and consultants who attended the Urban Land Institute’s Spring Council Forum in Atlanta.

Well over a third of respondents, 38%, predicted that the multifamily sector would outperform all others, while 26% chose the industrial sector as the brightest spot in a drab landscape.

Some respondents were encouraged by recent international market activity, which they said could indicate that the global economy has hit bottom and can now begin to recover.

“Our capital markets teams in the primary international markets are reporting increasingly positive signs that pricing floors are being reached, with a corresponding uptick in transaction volumes. This should bode well for the United States where the bid-ask gap still remains wide,” said Michael Zietsman, managing director of capital markets at Jones Lang LaSalle.

“Buyers have set pricing levels that are unappealing to most sellers, but it’s only a question of time before sellers move down and buyers move up to create a more efficient market,” Zietsman said. “We’ve seen this in the London market and I suspect that we are six to eight months behind.”

But despite the optimistic signs, most respondents were concerned about the lack of liquidity and the difficulty of obtaining debt to finance commercial real estate transactions. An overwhelming majority said liquidity is the single most important factor that will most influence development and investment in the coming year.

Most survey respondents predicted that performance across all sectors would decline in 2009, although many saw pockets of opportunity in the multifamily and industrial sectors. About 30% of respondents in Jones Lang LaSalle’s 2009 spring cross-sector survey said their investment spending would drop by as much as 30%, a smaller number than those who foresaw an increase in investment across the retail, office, multifamily, industrial and hotel commercial real estate sectors.

Despite the number of respondents who singled out the multifamily sector as a bright spot, that represented a drop from a year ago, when more than half of all respondents, 52%, said multifamily offered the best potential for outperformance among the sectors. This time, 57% said multifamily will falter by as much as 20% compared to other sectors.

While the industrial sector had its champions, with more than one-fourth seeing it as the strongest sector, a far greater number of respondents, 67%, foresaw a decline in performance of as much as 30% compared with other sectors.

The office sector fared worse than multifamily or industrial, with 100% of respondents saying it will underperform other sectors by as much as 30% this year. That continued a downward trend from 2008 when 47% of respondents predicted that the sector’s performance would decline by as much as 30% compared to other sectors.

The hotel sector fared little better, as 87% of respondents said it will underperform this year by as much as 40% compared to other sectors. That represents an increase from 54% of respondents last year who said it would underperform at the same level. Expectations for the retail sector also were dismal, with 100% of respondents saying the sector will decline by as much as 40% compared to other sectors.

The respondents indicated that the trends have affected them directly. With regard to occupancy of their commercial portfolios, 87% of respondents said it has fallen by as much as 20% for this year compared with 2008.

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