After spending more than a year in suspended animation, the commercial real estate industry is expected to hit bottom in 2010 with a wrenching thud.
Owners of business properties such as office buildings, warehouses and malls will suffer a surge of painful defaults, write-downs and workouts with their lenders as the market finally faces up to the reality of its diminished conditions, according to a report set for release today.
The long-awaited blood bath, however, will benefit investors who are able to swoop in to take advantage of record bargains.
Unlike the formerly overheated housing market, which is in the process of being purged through foreclosures and sellers' growing willingness to lower their asking prices, the business of buying and selling commercial real estate has been stuck in neutral since the recession kicked in.
So far, potential sellers have been loath to lower their prices, and banks have been unwilling or unable to lend money for purchases. Even financially strapped owners who are unable to keep up their mortgage payments haven't had to let go because their lenders don't want to take back distressed properties in a down economy.
Banks instead have often been willing to renegotiate loan terms, a practice drolly referred to as "extend and pretend," as both lenders and debtors hoped the market would turn around.
The era of wishful thinking is about to end, according to industry professionals who participated in a study by consulting firm PriceWaterhouseCoopers and the Urban Land Institute, a real estate industry trade group and think tank.
"The recession," said Richard Kalvoda, a partner at PriceWaterhouseCoopers, "is now impacting the fundamentals of real estate."
A key fundamental, for example, is office leasing. As white-collar companies lay off employees or go out of business in the tough economy, they no longer need as much office space. Landlords, in turn, lose rental income and find it harder to make mortgage payments.
With vacancy growing -- about 51 million square feet of space is empty in Southern California -- and rents falling, commercial property values are in the midst of the biggest drop since the Great Depression. Industry experts predict properties will have lost 40% to 50% of their value from the peak of mid-2007 by the time the market presumably reboots next year.
