Owners of business properties such as office buildings, warehouses and malls will suffer a surge of painful defaults, write-downs and workouts with their lenders as the market finally faces up to the reality of its diminished conditions, according to a report set for release Thursday.

The long-awaited blood bath, however, will benefit investors who are able to swoop in to take advantage of record bargains.

Unlike the formerly overheated housing market, which is in the process of being purged through foreclosures and sellers' growing willingness to lower their asking prices, the business of buying and selling commercial real estate has been stuck in neutral since the recession kicked in.

So far, potential sellers have been loath to lower their prices, and banks have been unwilling or unable to lend money for purchases. Even financially strapped owners who are unable to keep up their mortgage payments haven't had to let go because their lenders don't want to take back distressed properties in a down economy.

Banks instead have often been willing to renegotiate loan terms, a practice drolly referred to as “extend and pretend,” as both lenders and debtors hope for the market to turn around.

The era of wishful thinking is about to end, according to industry professionals who participated in a study by consulting firm PriceWaterhouseCoopers and the Urban Land Institute, a real estate industry trade group and think tank.

“The recession,” said Richard Cavota, a partner at PriceWaterhouseCoopers, “is now impacting the fundamentals of real estate.”

A key fundamental, for example, is office leasing. As white collar companies lay off employees or go out of business in the tough economy, they no longer need as much office space. Landlords, in turn, lose rental income and find it harder to make mortgage payments.

With vacancy growing and rents falling, commercial property values are in the midst of the biggest drop since the Great Depression. Industry experts predict properties will have lost 40 percent to 50 percent of their value from the peak of mid-2007 by the time the market presumably reboots next year.

Retail and office properties will take the biggest hits, the report said, as nervous consumers curb spending and companies delay rehiring. Many landlords who are barely hanging on now will lose their grip in 2010 -- and some investors can hardly wait.

“Our report participants find that a sense of nervous euphoria is growing among liquid investors who can make all-cash purchases,” said Stephen Blank, a senior resident fellow at the Urban Land Institute. “Those that are patient, daring and selective could score generational bargains on premium properties from both distressed sellers and banks that are clearing out unwanted bad loan and real estate owned portfolios.”

Among those poised to leap is real estate fund manager --avier Gutierrez of Phoenix Realty Group. The New York-based company is sitting on US$450 million it has ready to buy real estate. The money will be invested on behalf of pension funds and insurance companies, he said.

The current real estate scene is “definitely grim,” Gutierrez said, but the outlook for three years from now and beyond is much better.

Apartments may be the first commercial real estate category to recover as large cohort of people in their 20s leave home or stop doubling up with roommates when their economic status improves, Gutierrez said.

Hotels, which have been particularly hard hit by the recession, can also bounce back quickly when the economy improves, said Cavota of PriceWaterhouseCoopers. Office buildings, which are dependent on hiring, and malls, which are dependent on consumer confidence, probably will take longer to recover.

Real estate industry leaders who are meeting at the Urban Land Institute's annual gathering in San Francisco are more optimistic than they were at this time last year because they can see the reckoning finally on the horizon, said Richard Green, director of the University of Southern California Lusk Center for Real Estate.

“The mood is considerably lighter,” he said.

He is concerned, though, about whether bankers will do what he thinks they should.