Real estate experts expect financial and real estate markets to bottom in 2009 and then falter for much of 2010, with continued drops in property values and additional foreclosures and delinquencies, according to the 2009 Emerging Trends in Real Estate report, released this week by the Urban Land Institute and PricewaterhouseCoopers.

But there are a few bright spots in this rather gloomy forecast. At the top of the list: Apartments are the best opportunity investment next year, according to the report, which includes interviews and survey responses from more than 600 leading real estate experts, developers, lenders, brokers, and consultants.

“Even though there is a lot of doom and gloom in terms of the fundamentals, interviewees really believe that 2009 is a great time to buy,” says Susan Smith, director in the real estate business advisory services group at New York City-based PricewaterhouseCoopers. “The No. 1 buy is apartments. One of the main reasons why is interviewees see a very diverse economic and demographic demand for apartments, especially for transit-oriented housing.”

Warehouses are also a popular property pick, as they tend to offer steady returns despite economic declines, Smith says. The office sector, which fell in the middle of the road, had a delayed reaction to the economic crisis but will continue to feel the brunt of the pain for some time. Retail is the least-preferred property type, due to the dramatic decline in consumer spending in the past few months.

Looking ahead to 2010, expect to see some turnaround in all market sectors. “The good news will probably outweigh the bad; right now, it is the reverse,” Smith says. What will 2011 bring? The respondents are banking on a recovery.

Market Snapshot

The report offers a snapshot of markets to watch next year, with Seattle and San Francisco taking the top two rankings. Washington, D.C., landed a third-place spot, while New York City, which took the No. 1 spot last year, slipped to No. 4. “New York is an established market, and there’s a lot of demand there but there is a lot concern due to the city’s exposure to the financial markets,” Smith adds. Los Angeles took fifth place.

• Seattle: The city has slowly been climbing its way to the top of the list. “It’s become one of those gateway markets that investors like,” Smith says. The market is a strong buy for apartments and the No. 1 buy among industrials in the Puget Sound ports.
• San Francisco: The city ranks first for development and homebuilding and is a leading buy for apartments and offices. Foreclosures should remain in check.
• Washington, D.C.: The seat of the Capitol is ranked as the “ultimate hold market when the economy struggles.” Downtown office vacancies should remain below 10 percent and apartments will lease “no matter what.” Expect a strong outlook for retail due to above-average employment, but office vacancies are expected to continue in northern Virginia where further declines in condos and home prices are expected.
• New York City: The city is suffering job losses and office vacancies due to the Wall Street meltdown. Hotels are expected to continue attracting tourists due to the weak dollar.
• Los Angeles: Downtown Los Angeles will likely benefit from the influx of condo and apartment projects under developments. “It’s almost impossible to lose money on apartment investments if you have a five- or 10-year investment horizon,” one respondent said. Hotels are faring well, but homebuilders in San Bernardino and Riverside continue to struggle with the housing collapse.

Top opportunities in each of these cities:

1. Investors should sit tight; opportunities will surface at significant discounts.
2. Invest in maturity defaults, construction loans/bridge loans, or take mezzanine positions and equity stakes in properties.
3. Invest in REITS as they will lead the market’s recovery.
4. Focus on global pathway markets, including 24-hour coastal cities.
5. Staff up asset managers, leasing pros, and workout specialists; separate good assets from the bad.
6. Retrench on development, and reorient to mixed-use and infill.
7. Go green; cutting energy expenses is likely to be a priority.
8. Buy or hold multifamily; hold office; hold hotels; buy residential building lots, but be prepared to hold.
9. Purchase distressed condos in urban areas near transit.
10. Focus on neighborhood retail centers with strong grocery anchors and chain drugstores.

Source: Emerging Trends in Real Estate report