CHICAGO (MarketWatch) -- Commercial real estate is likely to suffer its worst year since the recession of 1991-1992, an annual study predicts, with property values falling, vacancies rising and developers forced to sit on the sidelines as capital remains scarce and debt markets struggle to right themselves from the credit crisis.

Although all commercial property types will be under pressure, moderately priced apartments and warehouse/industrial buildings will provide the best investment opportunity in the next 12 months, according to the 30th annual PricewaterhouseCoopers-Urban Land Institute "Emerging Trends in Real Estate" study released Tuesday.

"It's no surprise that 2009 will not be a good year for real estate development or investment. There is no escaping the minefield of the credit crisis and the broken financial system," said Stephen Blank, ULI's senior resident fellow for real estate finance. "And there is no quick fix."

Commercial real estate is only at the beginning of its correction, lagging behind housing and stocks, which have already been in a prolonged downturn, according to Blank and Jonathan Miller, partner in the communications firm Miller/Ryan LLC and author of the report. Property values are likely to fall 15% to 20% from their 2007 peaks, Blank said, before the bottom is reached in 2010.

"You're looking at an industrywide repricing of assets ... a dramatic drop in value and sharp increases in delinquencies and foreclosures," Blank said, although foreclosures and delinquencies will rise from what are record lows this year.

As a result, income for commercial-property owners will be under pressure and tenant demand is likely to decline for all categories except apartments, which could continue to benefit from the woes in the for-sale housing market, he said.

"The one saving grace for real estate is that development has been somewhat constrained, so overbuilding won't be the problem it was in previous downturns," Blank said. Developers, he said, "may as well head to the golf course next year" because there won't be money to build much of anything.

Prospects in decline

Of the 50 metropolitan markets tracked in "Emerging Trends," only two -- Houston and Dallas -- are rated as better opportunities for 2009 than for 2008. Those two cities "have been energized by oil," Miller said, but with crude prices having fallen recently, even their ratings could tumble next year.

Coastal cities rank as the top investment and development markets in this troubled environment, with metro areas sporting 24/7 lifestyles and gateway shipping and transportation faring best. Suburbs and second-tier cities will bear the brunt of the commercial downturn, Miller predicted.

It will be at least 2011 before markets begin a slow recovery, but things could get much worse before they get better, Blank and Miller believe, depending on the overall economic picture.

"It all depends on the economy," Miller said. "And we need a jolt."

Top 10 regional markets to watch in 2009

Seattle. The Northwestern city took top honors, even as it braces for rising downtown office vacancies and tepid job growth that will flatten rental rates. The Puget Sound ports are No. 1 among industrials. San Francisco. The city ranks first for development and home building, and is a leading "buy" city for apartments and office. Washington, D.C. The nation's capital is the ultimate hold market when the economy struggles: Downtown office vacancies should remain below 10%, and apartments lease no matter what. New York. The Big Apple takes a beating with the Wall Street job losses and office vacancies, but hotels benefit from foreign tourists and the city retains a core of wealthy residents. Los Angeles. L.A.'s downtown benefits from condo/apartment projects and the area's global pathway location. Inland Empire homebuilders continue to grapple with the housing collapse. Houston. The city stays relatively strong as long as energy stays hot. Boston. The job outlook there is more favorable than most cities, with financial district office space tight. Denver. A major federal government presence should buffer job losses. Dallas. Although office vacancies downtown are 20% or higher, apartments do well. Chicago. Apartments do well, but condos weaken as speculators leave the market.

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