Even as the economy struggles to regain its footing in the post-recessionary environment, the state of the commercial real estate industry remains questionable, according to a report by Grant Thornton.

Many experts estimate that a meaningful recovery is not likely to happen in the sector until 2011 at the earliest. 

Though the recession may have officially ended in the summer of 2009, improvement in the real estate market typically lags the general economy by 12 to 18 months.

Grant Thornton’s corporate advisory and restructuring services professionals have analysed the challenges facing the commercial real estate industry in the wake of the credit crunch and economic downturn in a new white paper.

Their study found that real estate companies would be ill-advised to depend solely on the economic recovery to be competitive in today’s market place.

With USD1.4trn in commercial property loans coming due over the next four years, lenders are expected to face overwhelming demand to refinance existing borrowings. 

Higher loan-to-value ratios, tougher credit standards and an uncertain securitisation market will put further constraints on liquidity. In short, the opportunities to refinance existing real estate loans may be limited. 

Commercial real estate market participants are expected to face an environment where capital may be tough to come by and competition stiff.

Furthermore, history shows that the companies with the strongest performance pre-recession are not necessarily the strongest performers post-recession. 

“Our findings suggest that benefits from a recovery are redistributed among industry players and are not necessarily correlated to pre-recession performance levels,” says Paul Melville, a partner in the corporate advisory and restructuring group at Grant Thornton.

Grant Thornton’s white paper analysed the return-on-assets of 100 real estate companies, primarily real estate investment trusts with publicly available data, in order to assess portfolio property performance from 1997 through 2009.

The median return-on-assets for each quartile trended downward, with the 2001 recession putting disproportionate pressure on companies in both the first and third quartiles.

The best performing companies before the recession experienced little to no benefit in return-on-asset performance after the recession ended.

The 2005 to 2007 asset price bubble and its subsequent deflation is apparent. Asset prices are expected to improve as industry return-on-assets stabilises, reflecting a more normalised relationship between returns and prices.

The white paper discusses how most companies tend to operate in survival mode during an economic downturn as they seek to conserve cash, but this thinking often leads to actions that deliver little or no value in the long-term, and may even erode value.

Grant Thornton proposes a framework by which companies can evaluate their ongoing projects and initiatives to ensure that the right balance is struck between short-term costs and long-term value. 

The white paper urges commercial real estate companies to act quickly. By the time the commercial real estate sector begins to recover, capital may already have become scarce.