U-M/ULI conference in Ann Arbor: Real estate trends in 2010 'should hit bottom'

And, he said, while the best-performing sectors will only reach “fair” activity levels, the next two years will present “an opportunity of a lifetime” for the commercial real estate industry.

However, he said, “if you’re going to go into it, you’ve got to go into it with cash.”

That’s because capital remains elusive for many borrowers, as lenders grapple with writedowns, defaults and workouts.

DiRocco spoke to a full conference room at the Michigan League to kick off the annual two-day, statewide forum.

He drew some groans early in the presentation when he flat-out said, “2010 is going to be mostly doom and gloom.”

But his assessment of how the industry got there and what it will learn as it rebounds seemed to offer some hope to the audience.

“Real estate is a cyclical market,” he said, “and we have to play it.”

Issues include how “borrowers and lenders are not on the same page now,” he said. “Financing is an issue.”

So is valuation, since commercial real estate value losses total 40 to 50 percent off of 2007 peaks, which is an issue for owners who overleveraged to buy, counting on appreciation. 

Delinquencies and defaults are soaring, leaving a situation “worse than 1990 but not as bad as the Great Depression.”

But the other blow besides financial is that “vacancies are rising across the board,” DiRocco said, particularly in office and retail properties, but also in apartments.

Statistically, DiRocco said, the U.S. appears to be out of the recession, “but I’m not as optimistic - I think it’ll be another year (before it’s felt).

“Debt impact is going to go on and on and one,” he said. And that debt includes consumers, not just the real estate industry.

One survey subject, DiRocco said, called the last few years in real estate “fake … based on borrowing.”

Yet Ann Arbor, he noted, could be in a fair position because even as the jobless recovery takes hold, it’s areas with economies based on brainpower that will rebound fastest.

Softening job categories will include both blue collar jobs and the middlemen between deals: brokers, lawyers, appraisers and other dealmakers, he said. Meanwhile, technology gains are removing links in shipping chains, limiting growth for warehouses and shopping centers.

The levels of vacancies across the U.S. mean that development is not likely to rebound before the real estate market.

“Why build anything when you can buy it cheaper?” DiRocco said, quoting one survey respondent.

A rebound in development, he projected, is up to three years away.

The Detroit area rated last in his survey for market activity, as the Midwest declines faster than much of the nation.

The best real estate bets, he said, will be found in areas with infill development opportunities and proximity to mass transit.

And anyone who can buy with cash will find opportunties, he emphasized.

“But don’t rush,” he said. First to market will be the most distressed assets.

Investors should focus on quality properties, which will become available at current, lower market rates. They should buy cash flow and real yield, and ditch the leverage model. Public shares of real estate investment trusts are recovering already and also may be worth an investment look, DiRocco said.

The best bets for developers, DiRocco said: “Write off the year. “

But by 2011 or 2012, there will be opportunities to focus on infill, projects connected to public transportation and “green” building efforts.

Other sectors with some investment potential: multifamily; hotels, which are suffering today; distressed condos and second homes; and land.

He suggests holding off on retail: “It’s kind of run its course right now,” particular in areas like Michigan that’s suffered population offers.

The conference continues on Thursday with several breakout sessions and a panel discussion on repositioning auto-related real estate.

Paula Gardner is Business Director for AnnArbor.com. Contact her by email or follow her on Twitter.