ING CLARION’S 2009 “US VIEW” Finds: Real Estate Markets Will Likely Remain Under Pressure Until 2010; Opportunities Are Emerging For Distressed Investors

NEW YORK – US real estate markets are likely to remain under stress at least until 2010, pressuring cap rates and bringing an increasing number of opportunistic investors into the asset class, according ING Clarion Partners 2009 industry report, US VIEW: Real Estate Investing in a Time of Uncertainty.

"U.S. commercial real estate is in the midst of its most serious crisis since the early 1990s," said David Lynn, Managing Director at ING Clarion and the principal author of the report. "In spite of the gloom, however, opportunities are starting to emerge. One result is that we are seeing more and more capital deployed into so-called distressed assets, as investors seek to take advantage of the dislocations in pricing caused in part by the extreme lack of liquidity in the market."

"This is traditionally the first step towards a broader market recovery," Lynn added.

The ING Clarion report notes that no property type has been spared from the decline. It projects that prices are generally headed lower and that cap rates for core real estate properties are headed higher, settling in at 7.5-8.5 percent over the next 18-24 months, up from approximately 6.1 percent in the first quarter of 2007. All major property types are under pressure, including industrial, office, and hotels. Even multi-family housing – a logical beneficiary of the decline in home ownership – has not been not immune, with job losses dampening demand and depressing rents.

The emergence of distressed investors in both properties and in public and private debt will be the next big story, according to the firm. Funds are being raised and money managers are beginning to deploy assets to take advantage of the tremendous dislocations in these markets.

The ING Clarion report points out that changes in underwriting standards are making both the refinancing and acquisition of properties more difficult, and that current owners seeking refinancing will almost certainly have to put up new equity. This in turn opens the door to the opportunistic investor. In US View, Lynn discusses several strategies that investors might employ in these circumstances:

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• Purchase a property at a distressed price (from an owner with refinancing issues or from the lender out of foreclosure);
• Purchase the original mortgage from the lender at a discount to par value, potentially taking control of the property in the case of default; or
• Provide a mezzanine loan or preferred equity to help the current owner bridge the financing gap, potentially taking control of the property in the case of default.

"We are starting to see an increasing number of motivated sellers that will be forced to accept low bids," Lynn said. "This will begin the process of clearing inventory and setting the stage for an eventual recovery."

The report notes that opportunities are also emerging in the publicly-traded mortgage debt markets, particularly in higher-rated Commercial Mortgage-Backed Securities (CMBS).

"With subordination levels of 30 percent, we believe that Super Senior CMBS must be exposed to an unprecedented level of defaults before facing any loss of capital," Lynn said. "Careful analysis of underlying properties, tenants, underwriting criteria, and loan vintages may identify CMBS tranches that offer excellent risk-adjusted return potential. We believe the recent expansion of TALF to include CMBS may present additional opportunities."

The reports notes that real estate investment trusts (REITs), are coming off their worst year in history and face additional headwinds in 2009, with dividends remaining under pressure and further cuts likely this year. Valuations, however, are beginning to look more attractive according to the firm, with the average REIT yielding nearly 7.5 percent at the end of February, and the average discount to net asset value (NAV) at 28 percent - its lowest since 1991. Yield spreads are historically high compared to both treasuries and the lowest-rated investment grade corporate bonds (Baa).

"The bear market in REITs has run deeper and is longer than anything we’ve seen before," said Lynn. "Those that survive the downturn will be well positioned to take advantage of the values that are starting to appear in the marketplace."

About ING Clarion
Founded in 1982, ING Clarion and its affiliates manage almost $40 billion in assets in the private equity, public equity, and public debt sectors of the real estate markets. The ING Clarion organization has more than 400 associates located in major markets throughout the United States.
 
The firm is the U.S. investment management arm of ING Real Estate, a global real estate company active in investment management, development and finance. With a total business portfolio of more than $140 billion and offices in 22 countries in Europe, the Americas, Asia and Australia, ING Real Estate ranks among the world's strongest real estate companies.

ING Real Estate is part of ING Group, a global financial institution headquartered in the Netherlands offering banking, insurance and asset management to over 85 million private, corporate and institutional clients in more than 40 countries.

More information about the firm is available atwww.ingclarion.com.

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Disclaimer

Some information contained herein is derived from selected third party sources believed by ING Clarion to be reliable, but no representation or warranty is made regarding its accuracy or completeness.  Opinions and forecasts expressed reflect the current judgment of ING Clarion's Research and Investment Strategy Group and may change without notice.   Nothing herein constitutes an offer or solicitation of any product or service to any person or in any jurisdiction where such offer or solicitation is not authorized or is prohibited by law.  Past performance is not necessarily indicative of future results.