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By Todd Lukasik, CFA | 11-06-2009 11:33 AM

Charting a Bottom in Commercial Real Estate

CoStar Group CEO Andrew Florance says the Fed will manage a soft delevering of commercial real estate, and while it bottoms, investors may have a rare opportunity.

Todd Lukasik: Hi, I'm Todd Lukasik, equity research analyst at Morningstar covering commercial real estate services firms and real estate investment trusts. Today I'm very lucky to have with me the CEO and founder of CoStar Group, Andy Florance. Andy, thank you for joining me.

Andrew Florance: Thank you for having me, Todd; it's a pleasure.

Lukasik: Obviously with the data and the customers that you have, you've got a good pulse of the commercial real estate market in general. Do you have any insights or thoughts that you can share with our viewers about when we might see transactions turn around, when we might see some of the fundamentals for the landlords turn around in what is so far been a difficult economy?

Florance: To make sure we don't end on a negative point here, I'll start with the negative and then go to the positive. Certainly there are some significant issues. Commercial real estate experienced exactly the same asset bubble that residential experienced. It's identical. If you do the Case-Shiller Index and you do a Repeat Sales Index in commercial real estate, it mirrors perfectly.

It was an asset bubble driven by the availability of risk-insensitive, super cheap credit. That problem exists, and I believe there's a massive delevering that has to occur, you've got to refinance trillions of dollars of debt, banks are going to be held to lower loan to value ratios, and there's going to be a big gap. That's going to put significant downward pressure on values, and I think a lot of debt will default.

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