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Commercial Real Estate: Time to Buy?

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Sellers desperate; buyers moving in for the kill.

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For what seems like forever now, we've been hearing calls for the impending collapse of the commercial real-estate market. Well, here we are.

Valuations, finally, are coming back to earth.

Commercial real-estate values are driven primarily by future cash flow expectations, rather than speculation on rising prices (like residential properties). Most tenants are locked into long-term leases, so evidence of the challenging business environment took longer to show up in vacancies and commercial defaults. Companies like Equity Residential (EQR), Vornado Realty Trust (VNO) and Boston Properties (BXP) could be hard hit.

Rents are now tumbling at record paces, vacancies are skyrocketing and retailers are closing up shop at an alarming rate. Sellers face a vacuum of buyers, as only the savviest of investors are in a position to take advantage of fire sale prices.

Buying in this market takes a strong stomach and patient -- very patient -- capital. A real-estate recovery, despite upbeat expectations based on 1 or 2 hopeful datapoints, is highly unlikely.

Nevertheless, the few investors out there with capital to deploy can pick through an endless stream of distressed, quasi-distressed and downright terrifying assets. It will be a wild ride, but for the few that can identify the proverbial diamond in the rough, buying now may be the best long-term decision they'll ever make.
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