by Calculated Risk on 11/06/2009 01:47:00 PM

Update: A couple points: CRE is a lagging sector (see Business Cycle: Temporal Order), and I make some pretty optimistic comments in the middle of this post. I'll try to put some number togther on household formation and excess inventory.

From Carolyn Said at the San Francisco Chronicle: Gloomy times for commercial real estate

Values will plunge, vacancies will rise and rents will decrease across all types of commercial property before the market hits bottom in 2010, according to the "Emerging Trends in Real Estate" forecast from the Urban Land Institute and PricewaterhouseCoopers LLP.
...
No quick recovery is in store, the report said. "2010 looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders," it said. "The shake-out period may extend several years as even some conservative owners with well-underwritten loans from the early 2000s see their equity destroyed."

The report suggests the first sector to recover will be apartments as "people who were forced to move back in with their parents seek their own places as soon as they find jobs".

This household creation is really the key to entire housing market. During a recession people double up with friends or move into their parent's basements - and this is pent-up demand for housing units (mostly apartments) once these people find jobs and regain confidence about their future earnings.

All will not be grim forever. The number of housing units currently being completed (single family and apartments) is significantly below the level normally required for population growth. This level of completions would usually be reducing the excess inventory, however the improvement is being masked by the loss of households due to the recession. Once the job market starts to improve, I'd expect a surge in household creation (mostly renters).

Unfortunately there is a catch-22. Usually residential investment contributes significantly to job creation at the beginning of a recovery - and the excess housing inventory is holding down residential construction employment this time.

For the other CRE sectors the outlook is very grim. From the Urban Land Institute:

Among property sectors, the survey finds declines or near low record lows in investment sentiment for almost every property type. Only rental apartments register fair prospects and all other categories sink into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are “largely dead” and drop to new depths and practically to “abysmal” levels for office, retail and hotels. Warehouse and apartments score only marginally better at “modestly poor.”