Commercial real estate values likely will drop significantly, foreclosures and delinquencies will increase sharply and property cash flows will fall, according to the 2009 edition of Emerging Trends in Real Estate, released on Tuesday by the Urban Land Institute and PricewaterhouseCoopers LLP.

"Many property owners are drowning in debt, lenders are not lending, and for many (industry professionals), property income flows are declining," said Stephen Blank, ULI senior resident fellow for real estate finance. "There is an unprecedented avoidance of risk. Only when financing gets restructured will pricing reconcile, giving the industry a point from which to start digging out of this hole."

Absent that, real estate experts see the financial and property markets bottoming in 2009 and floundering well into 2010, according to the report which surveyed more than 700 commercial real estate experts.

They also expect commercial real estate equity investments to fall into negative territory for the first time in nearly two decades.

While investors and owners this year have been grappling with a frozen credit market that has brought sales to a halt, next year they can expect a U.S. economic recession to usher in rising vacancy rates and falling rents.

"People have been so focused on the credit crisis (that) no one noticed the economy sneaking up to knock their legs out from under them," one person surveyed said, according to the report.

Overall, experts are bracing themselves for commercial real estate values falling by 15 to 20 percent from their mid-2007 peaks, with more severe declines for lesser-quality commercial properties in secondary and tertiary markets.

They see U.S. housing values, the heart of the credit crisis, bottoming in 2009.

Real estate experts as a whole said they believe that once governmental intervention programs take effect and the credit markets thaw, a second wave of bad debt and investments from the commercial real estate market will come ashore.

"Then ugly reality sets in -- taking losses, writing down values, and wiping out frothy gains from recent years," the report said. "More banks and investment banks could fold. The hedge fund casualty list will grow."

Long-term owners, who were more conservative in their projections and use of debt, will be able to manage their way through the downturn.

But those who piled on the debt to finance properties in the year or so leading up to the market peak in 2007 may find it difficult to meet their debt obligations.

Real estate investment trust stocks, which are already down 32.5 percent year-to-date, will lead any rebound, the report said. The experts also said that the "left-for-dead" commercial mortgage-backed securities (CMBS) markets, which helped fuel the commercial real estate boom by offering cheap debt financing, will revive, but in a more regulated form.

Experts say the bottom line is that the commercial real estate market will rebound, but that the days of cheap debt financing are gone, at least for the foreseeable future.

"Money will be made on riding markets back to recovery and releasing properties, not on ... financing structures," the report said.

In the meantime, those surveyed said they continued to favor U.S. markets in coastal global pathway cities, but the pecking order has changed. Seattle and San Francisco ranked at the top, followed by Washington, D.C. New York tumbled to fourth, weighted down by woes of the financial industry which had accounted for about a third of the demand for office space.

They expect markets such as Florida, Southern California and the Southwest to nose-dive, shot down by the housing bust.

By property types in the apartment sector should remain relatively resilient as younger people linger as renters, rather than turn into homeowners, the report said.

Retail is expected to hit the skids as consumers shy away from spending.

As for the rest of the Americas, Canada's more conservative approach to lending and investing should help buffer the country's real estate industry against significant fallout from U.S. and European economic travail, the survey said.

Certain Latin American cities will provide investment opportunities in 2009 because they lack supply of modern commercial real estate properties, the survey said. Investors said they prefer San Paulo, Mexico City, Rio de Janeiro, Buenos Aires and Monterey.