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With the national unemployment rate at its highest point since the early 1990s, expect the recession to be harder on commercial real estate fundamentals than during previous downturns, according to Boston-based Property & Portfolio Research Inc (PPR). After a transitional year in 2010, demand will begin to rebound for apartment, warehouse and retail properties. However, the office demand recovery will straggle behind that of the other property types as employment growth lags behind gross domestic product growth, and will not post gains until 2011, according to PPR.

With the national unemployment rate at its highest point since the early 1990s, expect the recession to be harder on commercial real estate fundamentals than during previous downturns, according to Boston-based Property & Portfolio Research Inc. (PPR).

Across the board, PPR's forecast released in early February predicts that vacancies will continue their ascent, with office, warehouse and apartment vacancies reaching record highs. National retail economic vacancies will hit levels not seen since the early 1990s, and one-third of the 54 major markets PPR tracks will suffer from economic vacancies (units not collecting rent or generating revenue), reaching an all-time high.

"If you thought 2008 was bad, brace yourself for an even worse 2009. Demand will be abysmal in all four major property types, with retail continuing to post the most significant declines," noted the PPR forecast. "However, while the demand outlook is bleak in the near term, there is a light at the end of this long tunnel. Projects under way will continue to deliver this year, but deliveries will be extremely sparse in 2010, allowing markets across the country to catch their breath, despite the softness of demand."

Through the current economic downturn, PPR said the Southwest will lead the nation in terms of supply additions across all property types.

After a transitional year in 2010, demand will begin to rebound for apartment, warehouse and retail properties. However, the office demand recovery will straggle behind that of the other property types as employment growth lags behind gross domestic product (GDP) growth, and will not post gains until 2011, according to PPR.

Be prepared for a more significant repricing of commercial real estate than happened in the early 1990s, PPR predicted.

Capital value gains from 2004 to 2007 will be largely erased as losses for all four property types continue through 2010. Apartment properties, generally less volatile than other property types, will take the worst beating, with values falling a cumulative 32 percent before beginning to recover in 201 1.

"While value losses will sting many investors, this repricing will present opportunities as the markets begin to recover," said PPR. "Although apartment and office properties will suffer the greatest value losses in the near term, they will also post the steepest capital value gains in 2012 and 2013, a cumulative 17 percent and 14 percent, respectively."