Forecast predicts commercial values to get even worse
By Eddie Baeb
Crain's Chicago Business
September 21, 2009
After plummeting over the past year, commercial real estate values in the Chicago area are poised to fall further and remain mired at recessionary lows for a couple more years, according to a new forecast.
The apartment sector is forecast to be the best local performer, with values coming off the bottom in 2011. The worst performer, retail, is poised to endure price declines through 2010 and rock-bottom valuations through 2011 and 2012, according to a “value cycles forecast” by PricewaterhouseCoopers LLP.
The forecast, which PricewaterhouseCoopers based on current and historic data from Torto Wheaton Research and REIS, asserts that commercial real estate values here have further to fall. While that may be unsurprising to many, the forecast also provides a grim answer to a more vexing question these days: Are we almost through the worst yet? In short: No.
In the office, retail and industrial sectors, the forecast projects that prices will remain at recessionary lows for two years. Only the apartment sector will see values start improving in 2011, while office and industrial begin rebounding in 2012.
“Let’s face the fact: We’re in the Great Recession,” says Charles DiRocco, the Washington, D.C.-based director and head of real estate research for PricewaterhouseCoopers. “This is the longest, broadest-based, most severe recession since the Great Depression.”
In the last big recession for commercial real estate of the early ’90s, the peak-to-trough cycle took about two years and brought values down about 40%, Mr. DiRocco says. This time around, values peaked in mid-2008 and in just one year plummeted 25% to 30%.
“We got hit really hard, really fast,” he says. “It’s not going to roar back. There’s been a lot of job losses, so it’s going to take a lot of time to recover.”
Chicago lags the national forecast in the retail and industrial sectors, while the region’s apartment market is poised to outperform the national market.
• Chicago-area retail valuations are poised to stay bottomed out in 2011 and 2012, while the national forecast shows the market not yet bottoming out until 2011 and then improving in 2012.
• The local industrial market stays bottomed out through 2010 and 2011 before improving in 2012. Nationally, the forecast anticipates valuations bottoming out in 2010 and then edging higher in both 2011 and 2012.
• The local apartment sector outperforms the national forecast by improving in 2011, while the national rebound isn’t expected until 2012.
• The forecast for the local office market lines up with the national forecast, bottoming out in 2010 and 2011 and improving in 2012.
Local real estate executives seem to have accepted that there won’t be a fast bounce off the bottom, although they question whether values will decline much more.
“Even though we might stay on that bottom for 24 months, it might not be as low as everyone thought,” says Tim Hennelly, vice-president of development with the local office of Minneapolis-based development firm Ryan Cos. “The thinking in the market is it’s not going to get much worse.”
Mr. Hennelly, though, says the employment picture needs to improve for the office market to rebound. Ryan is co-developing a new office building in northwest suburban Rosemont that computer networking giant Cisco Systems Inc. will anchor.
“We can’t fill up buildings if we’re getting 10-11% unemployment,” he says. “That’s got to start coming back.”
PricewaterhouseCooper’s new value cycles forecast was part of its third-quarter Korpacz Real Estate Investor Survey.
The survey had local data on the Chicago office market, showing that respondents put the average overall capitalization rate — a measure of first-year returns — at 8.49% in the third quarter. That’s up from 8.22% in the second quarter and just 7.03% in the year-ago period.
Capitalization rates, like a price-earnings multiple with stocks, move in the opposite direction of prices. When cap rates rise, prices fall.
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