NAR - December 17, 2008
With the exception of cash transactions, investment activity in commercial real estate sectors is nearly at a standstill because commercial lending has essentially halted, while job losses are curtailing the demand for space, according to the latest Commercial Real Estate Outlook of the NATIONAL ASSOCIATION of REALTORS®.
Lawrence Yun, NAR chief economist, said there are serious structural problems in commercial lending.
“Although access to residential mortgages has improved, the opposite is true for commercial loans,” he said. “We need liquidity for commercial mortgage-backed securities not only to free the market, but also to rollover existing debt. At the same time, the loss of jobs has had a significant impact on the demand for commercial space.”
Yun added that default rates on commercial real estate loans are very low by historical standards. “However, commercial defaults could deteriorate significantly without a properly structured stimulus that addresses liquidity for commercial mortgages,” he said.
REALTORS® Commercial Alliance Committee chair Steven Good, president and CEO of Sheldon Good & Co. in Chicago, said market conditions are very challenging. “Given that supply and demand for commercial space varies greatly depending on location, it’s important for businesses who want to sell or lease space to consult with a practitioner familiar with local conditions,” he said.
The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by Torto Wheaton Research.
Office Market
Office rent is likely to contract next year as erosion in the job market curtails demand for space. Vacancy rates are projected to increase to 16.4 percent in the third quarter of 2009 from 13.4 percent in the third quarter of this year.
Office markets with the lowest vacancies currently include New York, Honolulu, and Seattle, all with vacancy rates of 9.6 percent or less. The highest vacancies are in Detroit, Phoenix, and Dallas, with vacancies exceeding 20 percent.
Annual rent in the office sector is expected to slip 0.4 percent this year and decline another 3.6 percent in 2009.
In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen at 12.3 million square feet this year before contracting by 63.0 million in 2009.
Industrial Market
The industrial sector has been holding up fairly well based on the strength of exports, but the global economic slowdown will take a toll. Vacancy rates in the industrial sector are forecast to rise to 12.1 percent in the third quarter of 2009 from 10.7 percent in the third quarter of this year.
Industrial markets with the tightest vacancies include Los Angeles, Salt Lake City and Tucson, Ariz., with vacancy rates of 6.8 percent or less. Areas with the highest vacancies include Detroit, Stamford, Conn., and Phoenix, with vacancies of at least 15.7 percent.
Annual rent is estimated to ease down 0.8 percent this year and decline another 4.0 percent in 2009. Net absorption of industrial space in 58 markets tracked should total a negative 57.2 million square feet this year and a negative 134.9 million in 2009. Many obsolete structures remain on the market because much of the new construction has been built to suit specific needs.
Retail Market
Declines in consumer spending are impacting the retail sector. The retail vacancy rate will probably be 12.7 percent in the third quarter of 2009, up from 9.8 percent in the third quarter of this year.
Retail markets with the tightest vacancies include San Francisco; Orange County, Calif.; and Honolulu, with vacancy rates of 4.5 percent or less. Markets with the highest vacancies include Detroit, Columbus, Ohio, and Fort Worth, Texas, with vacancies of 15.6 percent or higher.
Average retail rent is expected to contract 2.0 percent in 2008 and fall another 7.3 percent in 2009. Net absorption of retail space in 53 tracked markets will likely shrink by 7.3 million square feet this year and contract by another 35.7 million in 2009.
Multifamily Market
The apartment rental market—multifamily housing—continued to benefit from weak home sales. Multifamily vacancy rates are forecast at 5.8 percent in the third quarter of 2009, unchanged from the third quarter of this year.
Markets with the tightest vacancies include San Diego, northern New Jersey, and Boston, with vacancy rates of 4.2 percent or less. Areas with the highest vacancies include Jacksonville, Fla., Phoenix, and Orlando, Fla., with vacancies of 8.5 percent or higher.
Average rent is projected to grow 2.9 percent in 2008 and 2.8 percent next year. Multifamily net absorption should be 24,400 units in 59 tracked metro areas this year and 142,000 in 2009.
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