Good REIT article from IBD

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Good REIT article from IBD

Post  Clive DeVuture on Fri May 01, 2009 4:59 am

Commercial Property Revival Comes After Economic Rebound
Posted 04/30/2009 07:37 PM ET

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* Top-Rated Company As the economy goes, so goes commercial real estate — eventually. The two don't march in lock step.

Commercial real estate typically trails the economy by at least a year. While the economy shows some springlike signs of life, commercial real estate is heading into deep winter.

"We expect leasing fundamentals to continue to weaken through 2009 and 2010 pretty much in all markets," said Maria Sicola, executive managing director of research at global real estate firm Cushman & Wakefield.

Many analysts predict the economy will start rebounding late in 2009 as stimulus money and loosened credit take hold.

But commercial real estate, up against continued job losses and a looming wave of loan maturities, won't start its return until late in 2010 at the earliest, they expect.

Bounds Of A Rebound

When it does, it is apt to reset to pre-bubble years 2003 and 2004, says Ray Torto, chief global economist at real estate giant CB Richard Ellis.

"We're all adjusting to a very extravagant night out," he said. "So you have to adjust back to more normal times."

Prices for commercial properties kept surging even as home prices tanked. The commercial side didn't really buckle until late in 2008 and the first quarter of 2009, a year after the recession began.

The fall was fast and hard.

Property data tracker Real Capital Analytics estimates that almost $73 billion in U.S. commercial assets is in distress, up from $19.3 billion in 2008's third quarter and $3.9 billion in early 2008. Some properties are on hold midconstruction, others are delinquent on loans or in default, or face liens or foreclosure.

Commercial property values have dropped as much as 40% since their peak, says Craig Leupold, president of Green Street Advisors.

Multifamily housing, he says, saw the fastest drop in rents and occupancies because this category has the shortest leases, typically one year. Offices and retail, in contrast, have three- to 10-year leases.

Mixed Results Appear

Apartment valuations have dropped less than other commercial sectors because financing still remained available at relatively good rates from lenders Freddie Mac (FRE) and Fannie Mae (FNM).

Unable to refinance $3.3 billion in debt, mall giant General Growth Properties (GGP) recently filed for Chapter 11 bankruptcy.

The U.S. office vacancy rate rose to 14.7% at the end of the first quarter, 70 basis points higher than the prior quarter, CBRE says.

Some commercial real estate sectors and locales will revive sooner than others, observers predict. One rule of thumb: Those that fell first are destined to come back first.

Clive DeVuture

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