Friday, November 27, 2009

2010 forecast a bust for commercial real estate in Jacksonville.

- by Christian Conte

The commercial real estate industry is on track to hit bottom in 2010 after a painful surge of write-downs, defaults, loan workouts and property value declines not seen since the Great Depression, according to the 2010 Emerging Trends in Real Estate report released by the Urban Land Institute and Pricewaterhouse-Coopers.

The annual report provides a forecast of the industry in the U.S., Canada and Latin America using data gathered from more than 900 individuals in the industry.

The good news, according to Chuck DiRocco, the managing director of industry trends and analysis at the ULI, is that this recession isn’t as bad as the Great Depression. The bad news is that it has been much worse than the savings and loan crisis of the early 1990s and its impact will reverberate in the commercial real estate industry for years to come.

“The recession is over,” DiRocco told a packed audience during a presentation of the report last week at the Omni Jacksonville Hotel. “But we have a lot more hurdles to jump before this is all over.”

Survey respondents said they considered 2009 the low point for real estate profitability, expecting modest improvements in 2010 with better prospects for investment and service companies than for developers.

In fact, developers, the report suggests, might as well write off 2010, 2011 and maybe even 2012 and instead start dreaming about a future that will include more urban infill, transit-oriented developments and green projects.

Until then, “you can close up shop, hit the links, convert operations to asset and property management or become a workout specialist,” the report said.

The coming year is expected to be the worst time for investors to sell property in at least 30 years, and debt markets will remain severely compromised, particularly by the escalating commercial mortgage-backed securities rollovers, which the report refers to as a “looming train wreck.”

The commercial real estate market isn’t expected to gain positive growth until 2011 or 2012, according to the report. The retail and office segments are expected to take the greatest hits, while the apartment and hotel segments are expected to rebound more quickly.

The presentation also included a four-person panel discussion with local real estate leaders, Cornerstone Regional Development Partnership President Jerry Mallot, BB&T Corp. City President Scott Keith, Ben Carter Properties Inc. Chairman Ben Carter and retired St. Joe Co. Chairman and CEO Peter Rummell. They, too, had bleak views about the malaise in the commercial real estate market.

“There’s a psychological impact that I’ve seen this time that I’ve never seen before,” Rummell said.

Geographically, the nation’s global gateways — cities with 24-hour-a-day attributes and brainpower centers —are expected to recover more quickly than the Midwest, particularly Detroit, secondary cities and those markets hit especially hard by the housing bubble, such as Florida.

Overall, Washington, D.C., tops the list as the most recession-proof city. Jacksonville ranked 35th among 50 cities — behind both Orlando and Miami, but ahead of Tampa — for markets to watch for commercial/multifamily investment in 2010. It ranked 25th — ahead of the three other major markets in Florida — as a market to watch for commercial/multifamily development. And Jacksonville ranked 31st — behind Orlando, but ahead of the two other Florida markets — as a market to watch for homebuilding.

Those surveyed for the report named job growth and interest rates as their largest economic and financial concerns moving into 2010, and refinancing and deleveraging their largest real estate and development concerns.

Getting through 2010 will be a matter of survival of the fittest in the commercial real estate industry, according to the report, and Carter agreed.

“What we’re down to right now is a cash economy,” he said. “If you don’t have the cash to survive, you’re going out of business.”

But, “if you can make it through 2010, you are probably going to make a fortune.”