With the New Year approaching, will the New Year bring an end to
what has been a more than challenging time for many people in the US
& the world?
The start of a new year often brings fresh hope, but as 2009
commences,optimism is in short supply in the all aspect of real
estate market. The sector suffered through its worst returns in
decades , and property values are expected to decline again in 2009
as the capital and financing is difficult to obtain. The swiftness
of the decline was stunning, even in an environment in which bad
news was expected.
Deteriorating economic conditions are likely to get worse before
they get better and thus continue to undermine real estate
fundamentals, prolonging the time when we begin to see a recovery.
Deleveraging is working its way through the system as the market
adjusts from a high-leverage system to one in which debt is scarce.
Taken in combination, these conditions will make 2009 a very
challenging year, but one in which an overdue cleansing of the
system is likely to commence in earnest. Glimmers of hope come from
the fact that interest rates and energy prices are low, good for
both the consumer and business.
Again what is in store is certainly not a quick return to where we
were in 2006 days. We have been in holding pattern since early fall
of 2007 although the stock market was bullish and having the highs
that preceded the real estate & credit crisis ,our President &CEO
Mr. Kami A. Merabi believes that last quarter of 2009 we should see
the beginning of a rebound ,albeit a slow one. That is our view at
Merabi & Sons in the general economy and real estate in general,
below are some of the key themes of our view for the real estate in
2009:
The commercial real estate market has followed the larger economy
into a downturn that is likely to last through 2009 and possibly
into 2010. With unemployment rising, consumer spending falling and
home prices dropping, the recession will impact all sectors of the
real estate market.
It is not yet clear when commercial mortgage debt will be readily
available. The CMBS market is out of the picture and traditional
lending sources are trying to preserve capital. The lack of
reasonably priced debt has made it difficult to complete
transactions.
Tarred with their association with financial firms and use of
mortgage debt, shares of U.S. REITs fell amid unprecedented
volatility in 2008. The sector should gain in 2009, but remains
subject to the performance of the economy and the debt capital
markets. Loan modification companies & bankruptcy attorneys are
going to be busy for a while taking care of home owners and
investors in the real estate.
After falling to historical lows of roughly 5.4% in 2008, cap
rates are likely to return to levels more in line with the 7.8%
National Council of Real Estate Fiduciaries (NCREIF) historical
average. Combined with declining net operating income, property
values will drop sharply from their peaks.
With distress comes potential for opportunities. The disconnect
between the pricing of public and private real estate, and equity
and debt, creates inefficiencies that can be exploited by investors
with available capital.
Overview for Europe
In wake of the intensification of the banking crisis that started in
mid-September, and the marked deterioration in economic fundamentals
in recent months, many of Europe’s economies are in or on the brink
of recession. Policy makers have responded by adopting aggressive
and unconventional methods in an effort to restore confidence in the
financial markets. While there are some signs of success, any
timeline for economic recovery depends on financial markets
returning to some form of normality, something that has yet to
happen. The commercial real estate market relies upon much the same
factors for its health, which means the worst is not over for the
sector. A growing consensus believes European values are only
halfway through a correction that could see a peak to trough fall of
up to 50% by the end of 2010. Rents are under pressure and are
likely to fall in the next year or two, not because there is an
over-supply of space coming to market, but because flagging tenant
demand has shifted the balance of power from landlords to tenants as
vacancy rates rise.
Understandably, investor appetite for real estate over the short
term has fallen sharply.
Overview Latin America
The year 2008 will be one of contrast in Latin America. Economic
activity boomed for the better part of the year, while other regions
of the world were way into a recession. Economies were buoyant until
the eve of the financial crisis. Growth rates through September were
above consensus forecasts in Argentina (6.5%),Brazil (6.8%), Chile
(4.8%) and Mexico (1.6%). In the aftermath of the global credit
crunch, however, it is now clear that the period of resilience has
come to an end. Lower commodity prices and economic activity across
the globe have hit the region. Countries such as Brazil, Chile and
Peru all saw diminishing trade surpluses towards the end of the
year. Mexico, which imports more than exports, saw its trade deficit
widen by the end of the year. Still, the region has put its
financial house in order in recent years and should emerge in
relatively better shape than many economies around the world.
Overview Asia
The property market boom that began in Asia several years ago will
end in 2008, due to the global credit crunch. Investors became much
more risk-averse as a result of the erosion of market confidence
that stemmed from the global stock market correction and economic
downturn.
After a reasonable performance in the first half of 2008, Asia’s
economy started to decelerate significantly in the second half,
particularly due to declining demand for exports and services. The
deterioration became particularly acute in the fourth quarter,
dampening market sentiment in the region’s property markets and
producing downward adjustments of rental income and property values.
The drop in values combined with the tighter credit markets produced
a dearth of real estate transactions.
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