Saying times are tough in American real estate right now is like saying the Grand Canyon is a hole in the ground. Report after report identifies the shovels digging things deeper: stringent lending conditions; negative equity; foreclosure sales; additional subprime mortgages soon due for reset. In short, with consumer confidence at its lowest level for 28 years, potential buyers could remain gun-shy for years.

In the residential market, California, Nevada, Arizona and Florida, are in the worst shape — house prices in Las Vegas and Phoenix reportedly have tumbled by a third since 2007 — but nationwide property crashes are affecting 87% of Americans. In the commercial sector, sales nationwide may have dropped around 70% between 2007 and 2008, according to Mike Larson, a real estate analyst for Weiss Research in Florida. Moreover, there is “more spillover from the residential slump and the economic downturn every day,” he says, citing record drops in construction activity, tightening credit, and continuing declines in Moody’s/REAL Commercial Property Price Index. “I don’t see a whole lot of reason for optimism right now,” he concludes. 


The short term looks difficult, says Nick Axford, executive director for international real estate advisor CB Richard Ellis in London. He says potential investors are uncertain about the severity of the recession and this, combined with the lack of liquidity, means they are biding their time.


It gets worse. According to a recent study by Urban Land Institute (ULI), a non-profit research group, and PricewaterhouseCoopers, the market sits in a witch’s brew of the recession, foreclosures, delinquencies and property value plunges. US real estate could hit bottom this year and not do much better in 2010. Larson cites a leading indicator for commercial construction by the American Institute of Architects that recently hit a record low.


Daunting for sure. Yet even the Grand Canyon has a floor. 


The ULI report, tellingly, says that even in this situation “opportunities will surface at significant discounts” while Axford says the US may be roughly at the bottom point now in terms of the volumes of investment 
activity. This is important, he points out, because there is “ample evidence that the best investments take place toward the end of the down cycle.” Good real estate investments are not made solely after rents have stopped falling, Axford says. He expects to see more transaction activity this autumn. 


According to Axford, seeing the market slow its fall may signal that the best assets, like grade-A properties, are about to be taken off the table. 


Incidentally, First American CoreLogic’s chief economist, Mark Fleming, has reportedly predicted that prices of American residential property will fall at a slower rate in 2009, a sign that the floor for home prices may be forming. That’s part of the equation. More buyers are likely if and when there is also a thaw in credit markets; a supply of housing that matches demand; low mortgage rates and home prices; and successful economic stimuli by the government. 


When the dust settles, expect to see a real estate landscape in the US, as elsewhere, predicated on traditional performance, according to Axford. In other words, investors will be less likely to plunge in with 2006/2007 bravado, and be more selective, managing assets to drive income returns. Axford warns Euro-rich speculators not to be too eager to pile into American real estate though, noting that few real estate investors rely on the unpredictable currency markets and most hedge currency exposure anyway.


Nevertheless the rewards appear ever more tantalising. In Manhattan, there has been a 30% drop in closed sales since the Lehman Brothers meltdown while prices for condominiums and co-ops have tanked and resales are down by almost 25%. Furthermore, economists predict that property prices will take additional hits from imminent job losses in New York City. On average, there was a 4.4% dip in asking rents throughout the city in the fourth quarter of 2008, including an 8.3% drop in midtown alone, but those drops may be shallow compared to the plunge in actual rents, brokers reportedly say. There’s a difference, according to a study by real estate services firm Studley, because as much as 40% of listed asking rents are negotiable. Landlords reportedly are offering enticements like a year’s free rent for longer leases, renovation assistance and other concessions. 


Naturally, realtors would be expected to accentuate the positive, even in the face of the most daunting prospects. Take hard-hit Florida. Kimberly Kirschner, 2008 chair of Greater Miami’s realtor association, is upbeat about the potential of a range of properties in her region. Among the reasons why: historically low interest rates and all-time high inventory rates. During the market’s heyday in 2004—07, speculators bought up many waterfront condominiums for swift resale, only to be trapped by the economic crisis. Kirschner says one result is waterfront prices that can be anywhere from 25%—45% less than what they were a year ago. Indeed, she is skeptical about investors staying on the sidelines into 2010. “Interested buyers don’t need to wait or try to time the market at this point,” she says, citing those inventory levels, which, while high, are coming down as buyers begin to take advantage, and those interest rates.”


As bad as things are in America’s most beleaguered markets, Wiss Research’s Larson points out that there actually may be year-on-year gains for home sales in parts of Florida and California as investors start to bottom fish. And in embattled Nevada, state employment officials reportedly are forecasting an economic recovery by 2010, which would be fortuitous timing for investors in €3bn worth of Las Vegas development projects slated for ribbon cuttings that year.


Daunting general statistics about foreclosure rates and big drops in prices in another beset market, Arizona, don’t tell the whole story, according to realtor Doug Groppenbacher of RE/MAX Commercial Investment in Phoenix. In his view, statistics have been skewed by rates in outlying areas. When times were good, “people drove until they could qualify,” says Groppenbacher. These buyers, Groppenbacher says, have been hit harder than those in Tempe, Scottsdale and parts of Phoenix.


He points out that returns on free and clear investments in residential rental are outpacing the cost of money, creating positive leverage. Further, retail, industrial and office vacancies are rising, as are capitalisation rates, resulting in falling prices and opportunities for investors with capital to pick up some bargains. The recovery timeframes for residential will vary by city, and he does not expect the retail leasing market to improve until late 2009 or early 2010. Things are bound to get better, Groppenbacher says, because “the old-time rules of real estate prevail: location is king.” 


Larson adds: “The sooner we can restore true value to assets that were wildly inflated…the sooner the supply of available property for sales will fall and the sooner we can all get back to a normal real estate market.” 


ULI’s Blank says that once this crisis ends, a sound, back-to-basic approach could work again. “We’re obviously being affected by the recession, but we are not being threatened by vast amounts of oversupply,” he says. There will be a tough but natural process of recovery, but Blank hopes that by the end, “not only will we have learned something but we will remember what we’ve learned.”

LAS VEGAS

The recession has hit Las Vegas real estate with a ferocity of a prize fight on the Strip. 


Metro area foreclosures — estimated to total 25,000 for 2008 — job losses, negative equity casualties, and frozen credit have made headlines for months. Planned retail projects and new office construction are down; office and retail vacancy rates are up. Casinos are reporting losses and are unloading assets.


However, “the more pain in the market, the more opportunities,” says George McCabe, a spokesman for the Greater Las Vegas Association of Realtors.


With average house prices back down to 2003 levels, the realtors association cites a “surge” in home sales: 184% up over a year ago for single-family homes; almost as much for condominiums and townhomes. 


Meanwhile, some commercial investors, betting their timing is right, are forging ahead with a number of high-profile properties. Developer Steve Wynn is one, opening the Encore, a €2bn hotel-casino, in December. About €12.7bn in hotel and casino projects are slated for completion this year; €3bn-worth are reportedly underway for 2010 openings. 


As McCabe adds, it all may go the core Las Vegas way — a boomtown that can be hit hard but still come back swinging.