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BURLINGTON, ONT- 06/03/09 - Images for a business story on the amount of office space that is currently available for lease. Many buildings have vacancies or are empty, and buildings are still under construction. (Photo by Peter Power / The Globe and Mail)pmp

Peter Power/Peter Power/THE GLOBE AND MAIL

Commercial real estate values in Canada have decreased by as much as 20 per cent through the recession and won't start increasing again until the middle of next year, according to PricewaterhouseCoopers LLP.

In a report released Tuesday and co-authored by the Urban Land Institute, PwC said conservative banking practices and stricter regulation likely kept real estate investors from overextending themselves with debt. But the 900 professionals surveyed still worry that a prolonged U.S. slump will chip away at their Canadian investments.

"The conservative, careful approach to managing government and markets is paying dividends now for Canadian real estate players," said Frank Magliocco, who leads the PwC Canada real estate practice. "Sideswiped by the U.S. fallout, they experienced a manageable market correction rather than a full-blown credit crisis precipitated market meltdown."

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Limp demand threatens to soften property cash flows across all sectors and most markets. PwC partner Chris Potter

Prices could start making up ground in the middle of next year, the report stated. However, investors could do better with properties in the United States and Europe, since their values fell further and could provide greater returns through a recovery.

The study says capitalization rates - used to measure the value of commercial real estate properties - will rise modestly in Canada by the end of the next year. Higher cap rates mean lower selling prices.

"For 2010, we are rating only fair investment outlooks for most property types and predict generally weak conditions for development," said PwC partner Chris Potter. "Limp demand threatens to soften property cash flows across all sectors and most markets."

We expect to see developers curbing their activity in light of softened demand as bankers rein in construction loans. PwC partner Lori-Ann Beausoleil

The report rated the investment prospects for each sub-sector on a scale of one to 10. Across Canada, apartment investment prospects ranked at 5.44 out of 10, followed by office at 5.04, retail at 5, industrial/distribution at 4.68 and hotels at 3.69.

Development prospects, meanwhile, never rose above the 3.74 out of 10 mark (apartments). Hotels suffered the worst in development options at 2.68.

"We expect to see developers curbing their activity in light of softened demand as bankers rein in construction loans," said partner Lori-Ann Beausoleil.

The findings are based on interviews and survey responses from real estate experts, investors, developers, property company representatives, lenders, brokers and consultants.

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