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NEW YORK CITY-Somewhere between the bullish V-shaped recovery and the dreaded “double dip” of a W-shaped one is where Bob Bach, SVP and chief economist at Grubb & Ellis, thinks the US economy will end up. Speaking here Wednesday at the company’s annual Real Estate Forecast preview for media, Bach predicted a U-shaped recovery, with fundamentals continuing to decline well into 2010, after which there will be a long, slow period of sustained growth. “Two-thousand-ten won’t feel like a classic recovery, but it will certainly feel better than 2009,” he said.

While Bach noted that “we’re light years ahead” compared to the fear and paralysis that gripped the industry a year ago, he said he anticipates little economic growth through next year. He cited a W-shaped recovery–which once again loomed as a possibility Wednesday after reports that housing starts unexpectedly fell in October–and long-term debt growth as potential risks to the national economy.

Regardless of whether October’s construction slump was a fluke after months of gains, Bach said all indications point to home ownership continuing to trend downward to historical averages. That bodes well for the rental market, which is why Bach believes the apartment sector will be the first to reach bottom and to begin gradually recovering thereafter.

Next in line will be the industrial sector, which is starting to be buoyed by what Bach called the “nascent rebound” in global trade. However, both industrial and retail, the third sector to recover, could be jeopardized by long-term consumer deleveraging.

Similarly, both apartments and the office sector, which Bach said will be last to rebound and could see an average 18.7% vacancy rate at the market’s trough, may have a “shadow” hanging over them. In the case of apartments, it’s shadow supply; for office, the risk is too much shadow space.

Looking at the investment sales market, Glen Esnard, president of the capital markets at Grubb, quipped, “We’re in the fifth stage of grief, which is acceptance.” It’s now generally accepted that property values are down 45% from the peak, said Esnard.

On the other hand, transaction volume is anecdotally up this quarter, even if Esnard’s prediction last year that 2009 would represent a 15% uptick over 2008 hasn’t quite panned out. Next year could see as much as a 100% improvement in volume over ’09, but even if that occurs, “it still won’t be enough.”

In the realm of current conditions, Esnard noted that portfolios and individual assets have been shifting from value impairment to actual performance impairment. Accordingly, he said it’s likely that we’ll see an increase in monetary/performance defaults as opposed to maturity defaults.

Jeffrey Shell, EVP of corporate finance at Grubb, said capital sources will favor either opportunist buys of distressed assets or those that offer long-term stability, such as single-tenant properties. He said that for single-tenant assets, the most liquid source of financing is credit-raised debt.

Shell also pointed to upcoming changes in lease accounting being considered by the Financial Accounting Standards Board,, as it looks to improve transparency and harmonize US practices with those of the International Accounting Standards Board. Among other things, the changes will mean no more off-balance-sheet leases of property and equipment, which currently total $1.3 trillion for US corporations. Conditions such as these will lead corporate users to be more opportunistic next year, said Shell.

The preview of Grubb’s 2010 forecast also featured presentations from the heads of its regional offices. David Arena, president of the New York region, called this the best time in 25 years to be an office tenant and the worst time in a quarter-century to be an owner. He said the available office space in Manhattan alone, about 53 million square feet, would by itself represent the fourth largest CBD in the US.

On the other hand, Arena pointed out that not all office assets are created equal. The vacancy rate is 0.9% in the handful of properties that have come on line since 2003, while it averages 19.8% in those built before 1989. He said the 91,000 new jobs predicted by both Moody’s Economy.com and the city’s Office of Management and Budget will restore employment by 2015 to essentially the same levels that prevailed before the collapse of Lehman Brothers.

Shawn Mobley, EVP for the Chicago region, noted that while rents will continue to tick downward and corporate tenants are currently basing their space requirements on an assumption of zero growth, the Chicago market is less volatile than New York City’s. A recent trend has been large tenants, such as United Airlines and Careerbuilder.com, moving from Chicago’s suburbs to its CBD.

A similar story of lower volatility–and therefore less pain–compared to coastal markets was told by Moody Younger, EVP of the Texas markets. “We didn’t enjoy the party as much as everybody else, so we don’t have as bad a hangover,” Younger quipped. Accordingly, while vacancy rates will continue to rise in Dallas/Fort Worth and Houston, Younger said these markets will be among the first in the US to recover.

California’s markets, including the Southland, San Francisco and Silicon Valley, have been harder hit by the downturn, said EVP Chuck Hunt. In Silicon Valley, for example, office rents declined by 25% in the space of a year, while vacancy will reach 22% in 2010. Los Angeles will see vacancy peak at 17.3% in 2011, Hunt said, while San Francisco represents the only market forecast to see an increase in class A rents two years from now, albeit a modest 3% gain.

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