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Commercial Property Values Likely Drop in 2010, Executives Say

Murray, Michael
More than three-quarters of surveyed executives expect commercial property values to fall this year, said Deloitte, New York.

Deloitte's online survey of more than 325 executives said 73 percent expected asking rents to drop this year and 76 percent said commercial property values will fall.

"The commercial real estate market continues to be adversely affected by one of the deepest recessions in decades. Increased unemployment has resulted in less demand for office space, reduced rents and an overall decline in commercial property values," said E.J. Huntley, principal of Deloitte Financial Advisory Services LLP and national leader of the real estate consulting practice. "Right now, commercial real estate executives are weighing their options, determining if the time is right to invest while prices remain depressed and before interest rates begin to rise."

Nearly three-quarters (74 percent) of those surveyed expected interest rates to rise this year and 48 percent predicted rates to increase by 50 basis points or more. Nearly 60 percent of executives said cap rates will increase--40 percent predicted cap rates to rise by 50 bps or more--and 57 percent forecast discount rates to rise, with 35 percent anticipating a 50 bp or more increase.

More than 60 percent of executives predicted a full market recovery will require two to three years, while 29 percent said a full recovery will take four years or longer. Only 8 percent surveyed anticipated a full recovery within the next year.

When asked how long they believed it would take for commercial real estate markets to return to peak levels of 2007-2008, executives offered much longer time frames--53 percent believed it would require five years or longer to regain that level, including 27 percent who said it would take seven years or longer, Huntley said.

"A recovery of the commercial real estate market from its current contraction will be protracted," Huntley said. "As a result, many commercial real estate executives are contemplating opportunistic investments."

Despite projections, 47 percent of executives already investigated potential acquisitions and 20 percent expected to begin doing so within the next year. More than half of executies and nearly 40 percent of commercial property tenants said their companies are investigating potential acquisitions. Fewer than half—46 percent of respondents--said current lower prices make it more financially advantageous to buy rather than lease.

While 33 executives predicted the market regaining its 2007-2008 level in three to five years, Deloitte said 11 percent anticipated up to three years for peak levels.

Surveyed executives included 186 from real estate companies and 141 corporate tenant executives. The corporate tenants primarily represented professional services, financial services, retail, life sciences and healthcare and technology.