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Hotels are a buy

Commercial market will lead nation's real estate recovery

Norm Miller, CoStar Group vice president of analytics, said contrary to popular opinion, the commercial real estate market should rebound quicker than residential, and now is an excellent time to purchase hotels.

Miller addressed the University of San Diego's Burnham-Moores Center for Real Estate's 15th annual real estate conference at the Hilton Bayfront Hotel on Thursday.

"Residential led the way into this downturn, but I believe commercial will lead the way out," he said.

Miller said the home foreclosure process takes so long it retards the residential recovery, and he couldn't remember when commercial real estate was strong while residential real estate languished.

"You're probably never again going to see a market like this in your life," Miller said.

Miller said part of the evidence that commercial markets are recovering is that trophy properties are in high demand.

The investments have ranged from The Blackstone Group (NYSE: BX) purchasing a 60 percent stake in the Hotel del Coronado last month -- which now has a recapitalized value of $590 million -- to Alexandria Real Estate Equities' (NYSE: ARE) $128 million acquisition of the 360,000-square-foot Nobel Research Center in the University Towne Centre market at the beginning of the year.

"Office REITs are real big buyers right now," Miller said.

The REITs are betting on higher rents, but first they must fill their buildings and the tenants must hire more people for that to happen.

"Everything would seem to be aligned. We're adding so little supply ... corporate profits may be at record levels ... we should be hiring 250,000 per month (nationally) but we aren't," Miller said.

With more spaces than tenants, despite the lack of construction, Miller said San Diego County's office market only really began to see positive absorption during the last quarter of 2010.

Miller noted that while tenants are general in the driver's seat today, rents on commercial properties will go up again within the next two to three years.

"You will see the hikes in multifamily rents even sooner," Miller continued.

For those who were hoping to get bargain- basement prices on commercial real estate, Miller said that boat sailed in 2008 and 2009.

That said, Miller said with room rates going back up, there has rarely been a better time to purchase hotels.

Miller's CoStar (Nasdaq: CSGP) estimated that about 37 percent hospitality sales in the fourth quarter nationally were as a result of some sort of distress.

"There are still two or three years of distressed opportunities out there," said Miller, adding there will be plenty of competition bidding up the prices if the asset is of a higher value.

Miller said lower value assets haven't had the demand of the trophy assets and that should continue to be the case for some time to come.

He was also quick to point out that lenders who have foreclosed know better than to dump these assets on the market all at once.

The troubled commercial property assets haven't only included hotels, Miller noted that retail tenants vacated some 175 million square feet of retail properties nationally within the past three years.

Despite these numbers, Miller insists that San Diego County isn't over retailed.

"And believe it or not, retail sales in general are at what were pre-recession levels," he continued.

What's interesting about this leasing, Miller said, is that it is dominated by discounters.

What he finds particularly surprising is the strength of Goodwill Industries stores, which leased more than 1 million square feet of space nationally last year.

"Did you ever think you'd see this?" Miller asked.

Whether it is office, retail or another asset classes, Miller said investors should consider partnering with tenants to purchase properties to reduce the risk and share in the upside potential.

Miller also said he is heartened by some other factors as well. He said projections by J.P. Morgan Securities and others that the Commercial Mortgage-backed Securities market would rebound the way it has, bodes well for the economy.

"How many thought we would be forecasting $45 billion in issuance in 2011," Miller said.

Not all is as Miller would like on the commercial front.

For one thing, he would like ratings agencies to be more accountable in their assessments. He admires their staying power, however.

"Ratings agencies are like cockroaches after a nuclear war." he said. "They have an uncanny ability to survive."

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