U.S. commercial real estate investors expect more property sales next year as lenders step up foreclosures to meet the hunger for distressed properties, an influential survey said Wednesday.
But they are wary of the U.S. economy and will continue to flock to higher quality properties whose rents cover mortgages, according to Emerging Trends in Real Estate 2011.
The report, by the Urban Land Institute and PricewaterhouseCoopers, surveyed about 875 property owners, developers, advisers, investors, lenders and other property companies. About 275 of the respondents were later interviewed.
The respondents said returns will revert to real estate basics, paying a price the rents can support.
"You can no longer make money off flipping; you must be able to manage assets at the property level," the report said citing one interview.
Respondents expect well financed lenders, such as insurance companies, to be able to negotiate good rates. They also expect well-capitalized borrowers, such as real estate investment trusts, to be among the top buyers.
About $1.4 trillion of mortgages on U.S. commercial real estate — including apartment buildings, hotels, office buildings, distribution centers, malls and shopping centers — are expected to mature between now and 2014, according to Trepp, a real estate loan data provider. Those borrowers will have to find new loans to replace the maturing ones and they will likely face less generous lenders.
That means the cash will have to come from other investors, higher cash flows from properties, or out of the borrower's pocket. If not, those borrowers could face foreclosures from lenders willing to face the write downs on their loans.
Experts said a lot of cash has been raised to buy distressed properties. But for the past two years, their efforts have been thwarted by lenders extending maturities rather than foreclosing and taking back properties.
Those surveyed expect lenders to gradually let go of more loans, and foreclose and sell more properties in 2011 and 2012.
Those sales are expected to result in property values that are 30 percent to 50 percent below 2007 peaks, the survey said.
Most respondents believed capitalization rates, or yields on the first year of ownership, will be either stable or shift downward by the end of 2011 as demand grows.
Like bond yields, capitalization rates move in the opposite direction of prices.
With banks balance sheets recovering and the commercial mortgage-backed securities (CMBS) industry slowly reviving, borrowers should have better chances to obtain refinancing, if they own relatively well-leased, cash-generating properties.
But owners with over-leveraged properties with rising vacancies and falling rents could face the most hostile lending environment, increasing the likelihood of foreclosures.
That could pave the way for investors with cash to snap up properties at what may be rock-bottom prices by contributing cash to floundering owners and gaining an ownership stake.
Or they could buy distressed loans and eventually own the property, or acquire properties at foreclosure auctions.
Yet respondents were concerned the pent-up demand for high-quality buildings will lead to fierce competition that will bid up prices in key U.S. markets, primarily New York and Washington, D.C., but including San Francisco, Boston and Seattle.
Survey respondents and those interviewed expect equity returns for stable properties to be about 7.5 percent for private institutional investors and 8.2 percent for real estate investment trusts.
For riskier property investments, returns were seen in the mid teens, the survey said.
Yet any recovery in real estate would be quashed by a downturn of the overall U.S. economy, respondents said.
"There's tremendous continued anxiety over whether or not we'll see a double dip (recession). If we see a double dip in the macro economy it's liable to have an impact on the real estate economy," said Mitchell Roschelle, PricewaterhouseCoopers partner.
"Even if we don't see a double dip, the profound belief was the economy, no matter how long it takes, will be jobless for some time."
The number one economic concern in the report was job growth. The number one real estate concern was refinancing.
Outlooks range from mildly pessimistic, believing the economy will rebound at some point; to those who were "grim" and said the downturn could last 10 years.
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