NEW YORK - The U.S. commercial real estate market, slammed by the credit squeeze and recession, is likely to hit bottom in 2010, according to a survey of industry investors, developers, lenders and consultants.

Commercial real estate values will fall 40 percent, on average, from their peaks in mid-2007, and up to 50 percent in some sectors, according to the 2010 edition of Emerging Trends in Real Estate, released on Thursday by the Urban Land Institute and PricewaterhouseCoopers LLP.

It will be the worst commercial real estate decline since the Great Depression, eclipsing the 1990s savings-and-loan crisis, according to the report.

Not surprisingly, the overwhelming sentiment (of) interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging, the report said.

Hardest-hit will be retail and office properties, reflecting a weak job market and cautious consumers. A growing population of men and women in their 20s will help the apartment sector recover earlier than other commercial real estate sectors, the report said.

It's going to be a year that's going to provide investors with tremendous opportunities at generational, cyclical lows, said Susan Smith, a director in the real estate advisory practice at PricewaterhouseCoopers in New York. There's a tremendous amount of money waiting on the sidelines.

Property owners who borrowed too much, or made unrealistic assumptions about returns, will be forced to sell, and the winners will be those with cash, she said.

RECOVERY

A recovery will begin to take root once U.S. financial institutions, infused with government cash, are in a position to foreclose on, or strike deals with, overextended borrowers. Banks will also start to dispose of properties, as will the government, which is going to hold real estate assets acquired from failed regional lenders, according to the report.

But debt markets will remain constrained in 2010 as banks increase lending only slowly, and a weak jobs market will prevent a robust recovery, at least initially.

The annual report, in its 31st year, is based on interviews with about 1,000 developers, investors, real estate service firms, banks and others.

Canada's real estate markets are seen escaping the worst of the U.S. credit collapse but are not immune to lower demand, the report said. Values are seen falling by up to 20 percent from their peaks.

Mexico's real estate fortunes are seen declining in line with those of the United States, while Latin American investment opportunities center on Brazil, a rising global economic power.

DEVELOPERS NOT WANTED

Interviewees cited jobs as the most important economic issue affecting real estate development and investment next year, followed by interest rates, wages, and inflation.

Metropolitan markets will be hit nationwide, but experts say values will be supported in top-tier markets, thanks in part to opportunistic institutional and foreign buyers.

Washington, D.C., has the brightest investment prospects and healthiest fundamentals, followed by San Francisco, Boston and New York, according to the report. Washington is typically the top market during recessions because of demand for space from government and related activity, like law firms.

Those surveyed said they expect, and hope, the U.S. government will take a more active role in regulating the real estate industry. But they are not looking to the government to solve the crisis with something like the housing tax credit or the Cash-for-Clunkers auto program that helped those industries.

The report also includes advice for participants in commercial real estate. For investors, pointers include doing deals in cash, not rushing into deals, focusing on quality properties, and sticking to global gateway cities.

In terms of property sectors, the report suggests buying apartment buildings and hotels, as well as distressed properties in resort developments. Industrial warehouses may also be an attractive investment as inventories rebuild.

For developers of new projects, the advice is blunt: Write off 2010, as well as 2011 and probably 2012.

You can close up shop, hit the links, the report said. Forget about construction financing -- that's a pipe dream.

(Reporting by Nick Zieminski; editing by John Wallace)

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