Real estate is in its worst slump since the 1980s, but insiders say the market could hit bottom several times over the next 12 to 36 months.
The culprit is the credit crunch, which is drying up financing and causing investors to flee. The problem: Just when things start to look better, another financial bomb explodes on Wall Street. The shock waves might keep real estate managers and investors reeling for years to come, experts say.
“It's like terrorism,” said Jack Foster, managing director and head of Franklin Templeton Real Estate Advisors, a real estate fund of funds firm in New York.
As a result, the market is in the doldrums. There are about 70% fewer transactions than a year ago and investors must pony up more cash for each deal that does get done.
Many buyers are choosing to sit it out until the market calms down. “There are half as many bids as there used to be,” said Bill Krauch, managing director of New York real estate manager ING Clarion Partners.
TIAA-CREF bought much less property last year than in 2005 and 2006, said Tom Garbutt, managing director and head of global real estate at the New York money manager.
Pension funds and other institutional investors are holding off on making new commitments.
For example, the $15.4 billion New Mexico State Investment Council, Santa Fe, is monitoring the market but is not actively pursuing any deals, said Charles Wollmann, spokesman. “Our baseline for returns has been elevated and there are a lot of deals that we just aren't going to get serious about in this market environment,” he said.
PricewaterhouseCoopers, in its first quarter 2008 Korpacz Real Estate Investor Survey, said major real estate players including pension funds “have large sums of capital to invest, (but) uncertainty surrounding the depth of the correction has many of them walking on eggshells.”
During the fourth quarter of 2007, real estate investors rated the investment outlook for cash higher than for commercial real estate, stocks or bonds, according to a real estate survey of institutional investors by Real Estate Research Corp., Chicago.
Some institutional investors are not buying real estate this year because the drop in the equities market has caused their real estate and other alternative investment allocations to exceed their targets, Mr. Foster said.
Others, such as the Oregon Investment Council, which oversees the $64.9 billion Oregon Public Employees Retirement Fund, have added a few investments in response to the market. The council made commitments to a few new real estate debt funds in response to current and near-term market changes, but is keeping to its long-term strategy, said Brad Child, senior investment officer at the Tigard-based council.