Even as capital returns to commercial real estate, fundamental problems such as unemployment and uncertainty over property prices are likely to hamper recovery, according to a detailed analysis of this segment by Pacific Investment Management Co.

The bond investment company, a unit of Allianz SE (ALIZF, ALV.XE), undertook a comprehensive study of commercial real estate similar to its overarching analysis of the housing market in 2005 that led to its prediction of a crash. For the latest study, Pimco's Investment Committee dispatched folks to 10 cities and met with more than 100 market participants to gather data.

"Commercial real estate shares most of the sins of its residential cousin--extremely weak underwriting, excessive leverage and absence of risk management from both banks and rating agencies," the study said.

Its key findings include:

--Capital has returned to commercial real estate. "But optimism should be tempered, because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations," the report said.

--The transfer of commercial real estate risk out of the banking system may take longer than previous cycles, and as a result, prices won't return to 2007 levels only toward the end of this decade.

--Macroeconomic factors such as unemployment will affect the outlook for rents, vacancies and capitalization rates.

Pimco suggests there are opportunities for patient investors as the deleveraging continues. Some of the options include dispositions of the assets of banks taken over by the Federal Deposit Insurance Corp., restructuring of large commercial loans and buying discounted subordinate positions in commercial mortgage-backed securities.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com
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