Like housing, commercial real estate is in a slump -- one that may not bottom out for another year or two as the value of offices, warehouses and malls dwindles.
Falling prices will create profitable opportunities for investors who can raise money to buy discounted property, Los Angeles real estate professionals said, but few buildings are selling and the market will suffer more before it gets better.
Landlords' pain will be tenants' gain, however, as rising vacancies pressure owners into lowering rents. Shrinking employment will reduce demand for offices and dump more space on the market at discounted prices.
Owners of all types of commercial real estate including hotels have been smacked by the international credit crunch and financial downturn, said Wayne Ratkovich, chairman of the Los Angeles branch of the Urban Land Institute, an industry trade group. And the grief is widespread.
"It's a pretty gloomy forecast no matter where you go," said Ratkovich, who is also a Los Angeles developer and landlord. "It's hard to find optimism out there."
The bottom of the market is six to 12 months away, according to almost half of the respondents to a recent Urban Land survey. An additional third of the professionals including developers, lenders, brokers and architects were more bearish, guessing that the bottom could be as far away as two years. Only 2%, though, said it could take longer than two years to start turning around.
Commercial real estate values became overinflated during the recent boom as publicly owned real estate investment trusts, pension funds and other buyers poured money into property acquisitions because they looked like surefire investments, industry observers said. Now fear has replaced greed as the motivating force.
"There is a psychological component to all this," said Robert Gardner, managing director of real estate consulting firm Robert Charles Lesser & Co. "Exuberance on the upside is being compounded on the downside and markets will overshoot in the other direction."
Worried lenders have practically locked their vaults for the time being, making financing for buying and building commercial projects extremely difficult to obtain. Funding is scarce even for comparatively modest deals of a few million dollars, unless buyers are willing to make substantial down payments. Large-scale property trades and developments look impossible.
"The mega deal is done" for the time being, Gardner said.
