U.S. Commercial Markets Enter 'Twilight Zone' in 2011

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Urban Land Institute senior fellow Stephen Blank told a group in Philadelphia this week that next year will develop as the "era of less, the Twilight Zone" for commercial real estate in the United States.

Blank was presenting the results of the institute's latest Emerging Trends study, which surveyed 875 industry professionals. The research found industry professionals expecting "high single digit returns for core properties." But with lenders stepping up foreclosure activity, valuation on many properties could "reset 30-40 percent below 2007 peaks."

"The market is predicting extreme bifurcation as the capital flight to quality creates a greater separation between the trophy and less desirable assets," Mitch Roschelle, a partner in real estate advisory practice leader, PwC said in a release.

"Well-located and well-tenanted properties that can generative strong cash flow over the next several years" in gateway cities will draw the most attention. However, while credit markets are expected to loosen up, "overleveraged owners dealing with high vacancies and rolling down rents may face more uncertain prospects in the credit markets, including the increasing likelihood of foreclosure," the survey concludes.

Properties in international gateway cities will lead the market, led by traditional global favorites Washington, D.C., New York, San Francisco, Boston and Seattle. Other cities likely to see increased activity include Houston, Los Angeles, San Diego and Dallas, according to the ULI.

Apartments were the most popular sector among respondents, who expect the struggles of the housing market to increase rental demand. Suburban office space was the least popular sector.

Transaction activity should improve as buyers "temper expectations," the report found.

"Investors with cash could have excellent opportunities to seize market bottom plays by recapitalizing cash-starved owners or buying foreclosed assets," Blank said in the report.

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