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NEW YORK CITY-The easing of a “short and shallow” recession at year’s end will be followed six months later by an upturn in commercial real estate fundamentals, which nonetheless are already solid. That was one of the long-term predictions offered by ING Clarion today in a presentation outlining the findings of its new market research report, “Real Estate Investment: Finding Value in a Changing Market.”

“It almost doesn’t matter who wins the debate about whether we’re in a recession or not,” said Stephen Furnary, chairman and CEO of ING Clarion, in a press briefing at the company’s offices here. However, he said, US commercial real estate on the whole has not yet felt the effects of the economic downturn, and any flattening of income growth so far has not been meaningful.

On the other hand, the debt crisis has made an impact on the appetite of would-be investors. Furnary noted that the Q1 volume of transactions for his company this year is one-third the normal level; ING Clarion racked up transactions totaling $5 billion per year in both 2006 and 2007. He predicted that the logjam will not break until investors believe that pricing has hit “rock bottom.”

David Lynn, head of US research and strategy, noted that another logjam affecting commercial real estate—inactivity in the CMBS market—is gradually breaking and will ease up sooner than it did during the downturn of 1990. “People compare this to 1990,” said Lynn. “But in 1990, capital wasn’t available. Today there’s a ton of capital sitting on the sidelines.”

Cap rates have not risen much in the past several months, perhaps 25 basis points, although Furnary noted that they’re “clearly trending upward.” Asked where cap rates will end up eventually, Lynn predicted they’ll land somewhere between the current level and 7.7%, without actually reaching the historical 7.7% average. He said years of cap rate compression have come to an end.

ING Clarion’s report identifies the credit crunch and US housing market downturn as the biggest threats to global economic growth. And the housing downturn will continue for a while: Lynn noted that US consumers have lost $2 trillion in home equity due to declines in prices, and he predicted that the subprime crisis will get worse and peak in the fall as variable-rate mortgages reset. By next year, however, for-sale housing will see renewed demand due to continued population growth and a lack of overbuilding in most markets, Lynn said.

“We don’t have oversupply in any sector,” said Lynn. “That’s pretty amazing, actually.” Supply in most sectors will remain tight as developers find it more difficult to get financing, Lynn said.

He added, however, that hotel oversupply could become an issue in 12 months to 18 months. The general perception of housing oversupply is exaggerated, said Lynn, and nationally the average time for burning through the current excess inventory is about nine months, although it will take longer in some markets.

Regionally, the picture as ING Clarion sees it is more varied. Based on an analysis of factors ranging from population trends to local economic fundamentals, the report cites the outlook for several major markets as either “expansion,” “mixed” or “contraction.” Atlanta and Charlotte on the East Coast are expected to expand, as are San Francisco, San Jose, Portland and Seattle on the West Coast. Dallas, Fort Worth, Austin and Houston are also expected to grow, along with Denver and Salt Lake City. The Detroit and Cleveland markets are predicted to contract, while a mixed forecast is offered for New York; Boston; Washington, DC; Orlando; Tampa; Miami; Chicago; Minneapolis; Phoenix; Las Vegas; Los Angeles; and San Diego. Notwithstanding the expansion predicted for San Francisco, the office sector in that city along with those of New York and Boston could be hit especially hard by downturns in the financial services sector, Lynn said.

In major US markets, an influx of foreign capital will continue to be a factor, especially as overseas investors take advantage of the favorable exchange rate, “which won’t last forever,” Lynn said. He observed a “decoupling” of the global economy from the US economy, as evinced by continued expansion in emerging nations such as China while growth in the US softens.

Asked whether the credit crunch would jeopardize the progress of large-scale projects such as Hudson Yards in New York City and City North in Phoenix, Furnary responded, “Big mixed-use projects are no more or less viable than they’ve ever been.” Those that are already under construction will be completed, he said, while the ability of banks to finance projects still on the drawing boards is tied to lenders cleaning up their balance sheets and bringing in new capital, as they’ve done in past cycles.

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