ULI, The Urban Land Institute and Price Waterhouse released their annual emerging trends report last week, predicting tough times for the Commercial Real Estate market in 2009. It will likely last through the first half of 2010.

Last year ULI predicted 2008 would be a year of uncertainty and that investors operating on debt would be the hardest hit by tougher underwriting standards and companies giving back space. Lehman proved them right by folding largely due to a REIT portfolio laden with under performing over leveraged apartment properties.

So when the ULI predicts that 2009 will be the toughest year in Commercial Real Estate Markets (CRE) since 1991-1992, and may eclipse 1991-92 in pain, attention must be paid to the report. The report warns of unemployment, projecting an unemployment rate of 9%, massive layoffs in the auto industry, hedge funds (obviously) and across the financial services industry, yet focuses on potential layoffs at Pepsi as the true harbinger of trouble.

However, it is not all doom and gloom despite one of the Emerging Trends authors claiming that the report may not be dark enough. There will be opportunities.

Soon enough, United States entrepreneurs and, possibly, more likely entrepreneurs from Eastern Europe, Asia, and the BRIC nations will retool the basics of the world economy. Eighteen months of constriction in office manufacturing and distribution space is likely. Then new business concepts will emerge, driving up demand for office, industrial and other commercial space. Strong foreign currency may fuel a drive for more American outlets of foreign companies also. This restructuring of the economy happened on a micro level in Connecticut fifteen, sixteen years ago as we slowly climbed out of the last recession.

However, there will be investment opportunities in real estate as slow adapting institutional investors previously operating in faulty investment strategies shed property to raise capital. Individual investors with cash; leveraging less debt will have buying opportunities as will tenants in properties.

DDR, Developers Diversified Realty Corp. is jumping the trend with its retail centers now, looking to sell large tenant anchored retail centers to its anchor tenants such as Walmart.

Other opportunities will appear as well in the form of banks looking to remove debt from their balance sheet. Property owners with equity in their properties and additional cash in their pockets may be able to buy out of their mortgages, renegotiate balances down and other wise take advantage of lenders need to work their way out of unbalanced profit and loss statements and balance sheets.

In Connecticut and much of the Northeast, property ownership isn't likely to change as greatly as in places like California's Inland Empire or large distribution centers like Memphis or New Jersey. To quote one of my commercial broker friends, "we haven't grown in the last 20 years, how far can we fall?" A point well taken. Port cities and business centers across the country according to ULI will be less affected by a slowing Commercial Real Estate market as well. So opportunities are there, but we'll have to go out and knock it won't be pounding down our doors.

-kristin


October 24, 2008