In an October report titled “The New Three D's-Distrust, Deleveraging and Deflation,” Southard noted the Troubled Asset Relief Program (TARP) could restore confidence in financing commercial real estate.

Retail Traffic: How will the TARP impact the retail real estate sector?

Jon Southard: TARP will address the lack of trust that has the prospect of pushing commercial real estate prices down even further. I see its goal as eliminating the discount that fear is putting on many financial assets…. In a perfectly executed scenario, liquidity is restored to the markets, including for commercial real estate.

RT: How long will it take?

Southard: I think this is where it comes back to, can there be an effective government solution that intervenes in the path we're on today? … We are headed toward a deeper recession and the credit markets have stalled; the timing of reversing those two trends comes back to an effective solution.

RT: What will have the most impact on retail real estate — Wall Street or Main Street?

Southard: On the consumer side, a mild recession that started in January has gained some negative traction. For developers and investors, the additional effects are on pricing and those are negative. The lack of credit means fewer buyers for investment properties pushing prices down.

RT: What about those said to be sitting by with plenty of “dry powder?”

Southard: Those who are sitting on the sidelines are reluctant to make the first move when there is so much uncertainty.

RT: What is the upside?

Southard: The perverse upside is there will not be a significant new supply of development to compete with as a result of the credit crunch. That's in contrast to the 1990s bust.

RT: And the downside?

Southard: The concern would be those tenants or chains that will survive and prosper during this period. The industry sectors that have held up pretty well to this point are the grocers and drugstores. They are traditionally more recession-proof so I am more optimistic on neighborhood and community centers; particularly in in-fill locations. On the flip side, the home improvement and supplies industry has entered a third year of what could be considered a recession.

RT: What are the commonalities among the U.S. geographic regions that have been least affected by the economic crisis?

Southard: The key is industry [and job] growth for those areas, including the Pacific Northwest, Texas and Boston. In addition to housing, they have been centers for population growth.

RT: Who among the industry's players is in the best position to capitalize on the current market conditions?

Southard: The owners, as opposed to developers and investors, are in a good position to sit tight. If they can maintain their income stream with existing leases and rents, they will receive decent yields as opposed to the now reduced Treasury yields…. Commercial real estate is in for a tough two to three years, primarily from the price adjustments. But the reestablishing of trust in the financial system could shorten that time frame to as close as the middle of next year.

JON SOUTHARD
Principal and director of forecasting, CBRE Torto Wheaton Research, an independent research firm owned by CB Richard Ellis, Inc.