NEW YORK CITY-Maximus Advisors, CWCapital’s affiliated research firm based here, recently concluded interesting research on the downturn and its implications for commercial real estate: namely, it expects a 50% all-in peak in declining valuations - and the industry is nearly 75% to 90% to that point. Maximus also projects that office vacancy rates will peak at 19%, from the current rate of 16.5%.

Bottom line - the bottom is almost at hand. Question is, which one? A valuations bottom or a fundamentals bottom. Peter Muoio, senior principal of Maximus Advisors, walked us through the findings and what they mean for investors and an eventual recovery.

GlobeSt.com: Explain to me what is significant about these findings. How are they different from 'the bottom is near' projections we have been hearing lately?

Muoio: We are closer to the bottom than a lot of people realize on a valuation perspective – but not as close to the bottom in fundamentals. So for starters, a property owner or fund manager should realize that even if valuations are stabilizing, NOIs will continue to deteriorate for a while longer.

GlobeSt.com: Is it unusual for fundamentals to lag valuations in a downturn?

Muoio: In the last significant downturn fundamentals deteriorated without a significant deterioration in valuations. We have to go back to the early 1990s downturn and then the data is so poor. We didn’t have same degree of valuation data. But, still, even then it is clear that fundamentals began to improve before valuations began to improve. Valuations didn’t start to turn around until 1996, even though we had a full blown economic recovery by then. Vacancies, though, had started improving from 1992 and rents starting in 1994. So in that case, valuations lagged fundamentals in the recovery.

GlobeSt.com: What can we conclude from all this?

Muoio: Our view is that the dynamics of this recovery are so intertwined with valuations, as well as with capital markets, that the reverse situation is going to play out this time. Valuations will have a bigger role in the recovery, along with capital market conditions. Then it will be augmented by NOI improvements that come with better fundamentals.

GlobeSt.com: In some ways your findings are a Catch-22: for a property owner that has debt on the property and needs meet the debt requirements, LTVs and so on, the valuation stabilizing is good news but he still needs income, which according to your data is a ways off. Is there is positive angle or take away from this?

Muoio: Investors should be becoming increasingly active if they wish to take advantage of the next cycle, if you wait for fundamentals to stop deteriorating you won't get the full pop. Also, they need to be careful not to ignore the wrong data or put too much emphasis on fundamentals.

GlobeSt.com: Don’t be expecting the same recovery we had in the 1990s in other words?

Muoio: Exactly.

GlobeSt.com: Which asset classes do you think will recovery first?

Muoio: Apartments will recover first especially in those markets that normally have a fairly robust supply. This time there is little supply in the pipeline and when demand returns existing products will benefit. This scenario should happen in markets like Florida, Northern Virginia and Texas. It is the same situation for certain condo markets, where construction has ceased for years now.