As housing prices near a bottom -- perhaps by late 2009 -- homes closer to cities with thriving economies and mass transit will outperform outer-ring suburbs and "exurban areas," where high gas prices are making long car commutes prohibitively expensive and rising energy costs mean higher utility bills.
That's the conclusion of a report released today by the Urban Land Institute and PricewaterhouseCoopers LLP that's based on interviews with more than 600 real estate experts, including investors, developers, lenders and real estate brokers. The Urban Land Institute is a nonprofit that bills itself as dedicated to promoting the "responsible use of land and in creating and sustaining thriving communities worldwide."
The report, Emerging Trends in Real Estate 2009, projects that the worst of the national housing downturn may be over, with a price bottom probably forming by late 2009. But there's still more pain to come, the report predicted, in part because mortgage lenders aren't backing off stricter standards and interest rates are probably headed up.
The report is focused on commercial real estate such as commercial, office, industrial and apartment properties. But it includes an overview of housing markets and how they may be affected by macroeconomic trends and changing regional conditions.
Home builders may have to continue selling tracts of land for cents on the dollar or face foreclosure on their holdings, the report predicts, adding to the already high rate of mortgage defaults and foreclosures.
As home prices continue to fall, "McMansion subdivisions in the sticks (will) take a double whammy," the report predicts. Rising heating and cooling bills could work against sellers already facing resistance to long commutes. "People realize they don't need 3,000 square feet and four cars anymore," one source interviewed for the report said.
Changing preferences could increase demand for condos in urban areas, many of which now have a glut of such properties. One respondent said their company had 30,000 unsold units in south Florida -- just as they did in 1975 and 1988.
At some point, those high-end Miami condos overlooking the Atlantic will be good buys," the report predicts, noting that ocean views "always find a market."
So-called "24 hour cities" like New York, Boston, Chicago, San Francisco, and Washington, D.C., should also benefit from mass transit systems that can free residents from car dependence, the report said.
"Fast-growing Sunbelt cities had pooh-poohed mass transit in their rapid expansions, enabled by interstate highway building during the 1960s and 1970s," the report said. "Virtually no one contemplated the consequences of car dependence until populations began to overwhelm road capacities."
The Sunbelt is also plagued by water issues, as spotlighted by droughts that tested Atlanta's reservoir system, which the report called "insufficient."
Water issues pose a challenge to further growth in areas dependant on the Colorado River and throughout the Southwest, the report said. Continued growth in areas like Las Vegas, Phoenix and Southern California will require increased conservation and new sources of water.
The suburbs will continue to retain an edge among many families looking for better school districts and child-friendly environments, the report said. But the mortgage crisis, high car-related costs and increasing property taxes mean moving to the suburbs requires greater sacrifices, the report noted. Federal grants that enabled suburban expansion by subsidizing the extension of roads and sewers are also in shorter supply.
Gains in the attractiveness of 24-hour cities could be "squandered" if cutbacks in police, fire and sanitation result in less safe and appealing environments, the report said. Falling property values and the economic slowdown are expected to cut into tax revenues, forcing cities to reduce services.
"Nothing would undermine 24-hour dynamics more quickly than rising crime rates," the report warned.
Seattle, San Francisco, Washington, D.C., New York and Los Angeles are expected to be the top five markets for investment in commercial property in 2009, the report said.
Wall Street layoffs and office vacancies will help Seattle and San Francisco to reclaim top rankings for commercial investment from New York, the report predicted, and California's large suburban satellite markets, Riverside and Orange County, are expected to "tank in mortgage and housing misery."
Seattle is braced for downtown office vacancies to rise above the current 10 percent, and demand for housing and housing prices are expected to slip but stay above national averages.
San Francisco offers "a high quality of life with a well-diversified economy," the report said, and the city ranks first for development and home building. Even though housing prices are expected to decline, foreclosures should remain in check, the report notes.
The thriving energy industry is expected to boost commercial investment prospects for "long-forlorn" Texas markets, but Midwest factory towns are expected to lose even more ground, the report said.
Houston makes the report's list of top 10 commercial markets since 1995, as office vacancies are expected to drop to 10 percent.
"Cheap land results in cheap housing, and prices have not gone up dramatically," the report noted of Houston's housing markets.