Bargain prices could help US commercial real estate market recover

Commercial property landlords in the US are in survival mode as the sector struggles to maintain values but real estate investors are optimistic that bargain prices will help the industry.

All commercial property types and all areas are badly hit by the US property crisis, according to the 2009 PricewaterhouseCoopers Korpacz Real Estate Investor Survey which covers the first quarter of the year.

Real estate investors do not expect a rebound in any of the commercial real estate sectors until well into 2010, according to the survey. In the meantime, property owners are faced with limited financing options, declining tenant demand, rising overall capitalization rates and deflated confidence.

They are looking to protect the value of their existing properties in order to compete and survive in an increasingly challenging environment. To mitigate value loss, landlords are being more proactive about signing tenants to new leases, expansions and renewal, in some cases offering leasing incentives and lower rental rates. In addition, some are attempting to cut property costs and better position assets in a rapidly growing tenants' market.

'Tenants are in the driver's seat, and landlords are in survival mode, trying to preserve revenue streams in one of the harshest ownership environments ever encountered,' said Tim Conlon, partner and US real estate sector leader for PricewaterhouseCoopers.

'It will be survival of the fittest going forward, with owners who are able to remain financially strong being better positioned to capitalize on the buying opportunities that are to come,' he added.

But there is optimism for the future. Although sales have been weak, investors said that they expect buying opportunities to emerge in the coming months as commercial loan defaults increase and the number of distressed assets on the market increases.

In fact, some investors are preparing for potential acquisitions by boosting their liquidity through de-leveraging, joint venture partnerships and select dispositions of current holdings.

'However, the bid-ask pricing gap remains wide between buyers and sellers, pricing is opaque because of limited sales activity and financing remains scarce,' the reports point out.

'Also making acquisitions difficult is the fact that recession conditions in commercial real estate are not expected to ease until 2010 at the earliest for most major property types. The one certainty they can hold on to is that there will be a recovery, but, until then, they need to determine how to survive under some very tough conditions.'