Last year the Urban Land Institute's Emerging Trends in Real Estate report was somewhat hopeful about most real estate sectors, except for housing which was, and still is, in the tank.
"Not surprisingly, real estate firm profitability forecasts turn sharply more negative from last year's report." This year 45 percent of Emerging Trends' respondents expect poor to fair results in 2009, and only 16 percent anticipate a very good to excellent performance.
The Emerging Trends report is a measure by which to retool real estate perspectives, although there is not much to retool for 2009 as every market sector is on the D-list. Real estate developers are usually a very optimistic group, but not so this year. The experts have taken counsel and have weighed in on where the smart real estate money is going - which is nowhere. The smart move, with very few exceptions, is to the sidelines.
Commercial real estate is facing a bearish market, following housing and the stock market. The experts weigh in on the best bets for next year's real estate market - what to watch, what to avoid, and where to place your bets for investment, development, and property sectors.
Here's the lineup for this year:
Emerging Trends’ Best Investment Bets for 2009
- Be Patient and Husband Cash. Until sellers relent, investors should sit tight. Amass capital. "Investments made in 2009 could result in substantial future returns."
- Buy Discounted Loans. Opportunities will appear when pressure builds for lenders to resolve damaged balance sheets. Watch underlying collateral and carefully scrutinize loan positions where lower tranches of senior debt "may have no value."
- Recap Distressed Borrowers. Recap equity returns for debt risk from over-leveraged owners looking for lifelines for new capital sources. Investors will be in the driver's seat.
- Hold Core. “You’ve got to know when to hold ‘em.” That’s now. Hold versus selling as vultures circle. Income producing assets will likely show losses for now. Time to maintain and position to lose less.
- Buy Public REITs. These stocks have taken a beating, but will lead any market recovery. Many larger well capitalized companies with manageable debt loads should provide an opportunity at lowered share prices.
- Focus on Global Pathway Markets. The 24-hour coastal cities will hold value better and bounce back more quickly. Including Los Angeles, Seattle, New York, Washington D.C., Boston, and in better days Miami, these elite centers and cultural centers are linked directly to Asian and European commercial capitals.
- Staff Up Asset Managers, Leasing Pros, Workout Specialists. It is property triage time. Separate good properties from bad and protect as much value as you can. Put workout specialists on the bad assets and the best asset managers and leasing agents on the good properties. “Do the best you can to lose less.”
- Retrench. The stars are not aligned for success. "Financing is limited, tenants are scarce, vacancies increase, and construction costs remain high."
- Reorient to Mixed Use and Infill. In the next round of building the Mixed Use projects will be king. Energy prices and traffic congestion will accelerate the move closer in to metropolitan urban centers. As the country scales down, higher density, well-located lifestyle properties will become even more popular as buyers seek an alternative lifestyle to the economically-challenged suburban McMansion.
- Plan More Transit-Oriented Development. Metropolitan areas realize that mass transportation systems are needed for economic growth. People are seeking to drive less and looking for transportation alternatives. "Developers can't miss securing project sites near rail stops and train stations."
- Go Green. Green technologies become ever more important. Energy costs, although down today, will do nothing but go up over the long term. For income producing properties, going green is a no-brainer - lower operating costs, tenant preference, opens better sources for financing, and a better return on sale. Perhaps even more important, you risk becoming obsolete without it. Residential green building will be slower and driven only by buyer's demand. Hard to justify in new homes when the lowest price is the market driver. Green will however be a hot button in the home of the future, but only when preceeded by economic recovery.
Emerging Trends’ Best Bets for Property Sectors 2009
- Buy or Hold Multifamily. Apartment investments get a star from Emerging Trends. Increasing rental demand is spurred by the recessionary economy and the implosion of the nuclear subprime loans across the country. Increasing demand "will ensure solid cash flow increases when the economy improves."
- Buy or Hold Industrial. Focus on coastal global pathways and primary international airport hubs where rates will recover first from temporary soft demand. Watch for distressed owners and pick off bargains in top markets.
- Hold Office. Long-term leases will help bridge the downturn. Hire the best lease management talent and focus on tenant relations.
- Hold Hotels. It's no time to sell. Occupancies and room rates suffer.
- Buy Residential Building Lots. Look for the bargains as distressed builders liquidate lot holdings. Whether the buy is from a builder in pain or from lenders out of foreclosure, the cents on the dollar prices offer great potential. Investors must be prepared to hold for a while as it will take time to absorb the over-developed inventories.
- Purchase Distressed Condos. There are plenty to choose from as prices are continually squeezed by terrible demand. As developers and desperate sellers seek to unload units, the opportunities for profitable rental properties are enticing. But choose well. Properties in urban areas near transit make the best bets.
- Pray for Retail. "Mall owners hope consumers haven't collectively shopped till they dropped." Best immediate bets for retail is neighborhood centers with grocery or drugstores as tenants.
That is alot of words to say that all real estate asset classes are hurting. ULI's Emerging Trends report however puts a ruler to the depth of pain for each category.
Real Concepts Series based on ULI's Emerging Trends in Real Estate 2009:
Part I - Hold On and Try to Lose Less
Part II - Best Bets for Real Estate in 2009
Part III - Where's the Money?
Part IV - Markets to Watch
Part V - Property Types in Perspective
Emerging Trends Charts & Graphs
Click here to obtain the entire Emerging Trends report from the Urban Land Institute.