Finally, after three difficult years of dislocations and losses during which property values were reported to have declined by as much as 40 percent, some relief is coming. So say participants in surveys for Emerging Trends in Real Estate® 2011, an annual report covering the United States, Canada, and Latin America, sponsored by the Urban Land Institute and PricewaterhouseCoopers.

The forecasts in Emerging Trends and their clarity derive from a unique research process that includes one-on-one interviews with, as well as online and in-print surveys from, a wide array of real estate industry participants, including public and private owners and developers, institutional investors, real estate advisers and service providers, and conventional and securitized lenders. More than 850 people participated in the interview and survey process this year.

While participants prepare to enter an “Era of Less,” they finally feel some relief and respite from weakening property fundamentals, noting varying degrees of improvement in all property sectors and geographic markets. Nonetheless, concern remains focused on larger systemic issues—the direction of the economy, combined with a lack of sustained job creation.

Lower rates of return, fewer developments, lower industry population, reduced availability of credit, and lower profits are but a few of the changes interviewees see in the real estate world as they prepare for this new era. In addition, the real estate industry is confronting an economy emerging from the worst economic period in memory and slowly recovering fundamentals.

As always, Emerging Trends interviewees and survey participants identified which markets to watch in terms of commercial and multifamily investment. This year’s top five are, in order, Washington, D.C., New York City, San Francisco, Boston, and Seattle. Multifamily properties offer the best investment prospects and retail the worst, with industrial/warehouse, hotel, and office prospects falling in the middle.

As in previous years, the multifamily residential sector is forecast to benefit from the single-family housing bust and favorable demographics, and financing from Fannie Mae and Freddie Mac will support investment activity. Full-service center-city hotels remain the top choice for opportunistic investors, while core investors express their preference for warehouse property and infill grocery-anchored retail space. Few seem to be focused on suburban offices.

For the foreseeable future, developers remain sidelined, waiting for the economy to provide more opportunities beyond the occasional build-to-suit and corporate and government net lease. Continuing changes in technology are altering the requirements for office property and industrial/distribution centers. Developers need to learn to deal with requirements for less space per capita because office lessees require increased productivity from every square foot they lease. For distribution properties, e-commerce and throughput systems are among the factors changing distribution patterns and space needs.

Homeowners and apartment renters are learning to adapt and live in smaller houses and apartments; echo boomers, empty nesters, and an aging population are increasingly focused on infill areas and urban 24-hour locations, as well as urbanizing suburban nodes. Fringe areas, with their vehicle-based lifestyles and their endless rides to work, shopping, and recreation/entertainment, are seen as less and less appealing. The retail sector continues to be hurt by e-commerce, with few people surprised when Amazon recently announced it had sold more e-books than hardcover editions during the second quarter of this year.

A flight to perceived high quality continues as investors express preferences for coastal gateway cities with their 24-hour lifestyles and access to global airports, and are seemingly unwilling to spend the time and resources needed to understand and rationalize secondary and tertiary markets. Investors cite a lack of in-migration, job creation, economic growth, and liquidity as factors influencing their decision to ignore these markets. Performance metrics and expectations have clearly declined, with investors acknowledging high-single-digit returns for core assets, rising to the midteens for higher-risk investments. Leverage necessary to support the higher rates of return received in earlier periods will just not be available—at least for a while.

While mortgage financing is becoming increasingly available, both for acquisitions and refinancing, interviewees and survey participants expect that lenders—bolstered by renewed earnings and stronger balance sheets and unwilling to just kick the can down the road for yet another year—increasingly will turn to “foreclose and dispose” strategies. Cash-rich investors may find the opportunistic investments they have been waiting for impatiently. Next year is likely to be the year to take advantage of the need for financial institutions to continue to deleverage. While underwriting standards are expected to be rigorous, low interest rates and attractive spreads make financing eminently affordable. Issuers of commercial mortgage–backed securities will complete an increasing number of multiborrower transactions in 2011; clearly they are back in business.

Emerging Trends interviewees and survey participants noted hopeful signs and myriad issues of concern, opportunities, and pitfalls. Learning to operate and prosper in an Era of Less will not be easy. For those who learn to adjust, focus, and exhibit a willingness to take measured and well-researched risks, 2011 may prove to be very profitable.

Read more about Emerging Trends in Real Estate®.