July Commercial Real Estate Update

Expect near-record office vacancy rates in 2009, says Grubb & Ellis Detroit has highest vacancy rate of any major U.S. city, New York the lowest
By Matthew Scott
July 21, 2008
Office vacancy rates are headed up and by the end of 2009 may be close to an all-time high. Cutbacks in key industries such as information technology, finance and professional services have led to more than a quarter-million layoffs during the first half of 2008, which has emptied an estimated 38 million square feet of office space.The result? According to a report issued today by commercial real estate advisory firm Grubb & Ellis, the percentage of U.S. offices that are empty could hit 17% by the end of next year.That’s a startling figure, and not far off the numbers seen in the prior two recessionary cycles. The vacancy rate hit 17.9% in the first quarter of 2004; during the third quarter of 1991, it topped 18.0%. As of June, the national office vacancy rate stood at 14%, marking the second consecutive quarter the rate has increased by .5%. Detroit has been hit hardest, with a whopping 22.6% office vacancy rate. Conversely, New York City had the lowest vacancy rate among major U.S. cities, at 5.6%. According to the report, office rental rates are also under pressure. While average asking rental rates for Class A and Class B office space edged higher in the second quarter—Class A up to $36.15 a square foot and Class B up to $27.89—Grubb & Ellis expects rates to remain flat over the next few quarters.Over the last year, only eight markets saw Class A rates decline, but during the second quarter, 22 of the 59 markets surveyed posted lower Class A rental rates, indicating a definite downward trend.Another sign of office market weakness: The amount of space offered for sublease increased for the fourth consecutive quarter. Sublease space has risen 18% since mid-2007, to 86 million square feet. As office vacancies increase into next year, some owners of real estate assets may experience hardships.“Rising vacancies and softening rental rates are expected to result in some forced asset sales by investors, particularly those who purchased recently with the ‘aid’ of floating-rate debt and overly optimistic pro formas,” the report warned, suggesting that institutional investors with large cash balances will scoop up bargain properties as they appear.

Chris' comments: Look out! We may now be on the verge of the "dam breaking". Commercial Real Estate has so far been able to dodge the hardship that residential real estate has encountered. BUT, this may not be the case for long!

July commercial Real Estate Update

Commercial Real Estate Easing in Economic Slowdown
Paul Partyka, Editor , American Coin-Op
Published 07/07/2008 - 9:01 a.m. CT

Foreign buyers are focused on retail strip centers in Southern California, Chicago, the Northeast and the Southeast, according to NAR. (Photo: iStockphoto.com/sjlocke).
ABOUT THE AUTHOR
Paul Partyka, Editor
Website:http://www.americancoin...
Email:ppartyka@crain.com
WASHINGTON — Are you looking for a new laundry? Commercial real estate vacancies are trending up modestly, while investment has dropped sharply in the wake of the credit crunch, according to the National Association of Realtors (NAR). “Although the supply-demand fundamentals are broadly favorable in most commercial real estate markets, vacancy rates are rising modestly and rent gains are slowing,” says Lawrence Yun, NAR chief economist. “Slow economic growth is lowering the demand for commercial space, mostly in the office and industrial sectors.”Tight credit availability has significantly slowed the volume of commercial real estate transactions, says Patricia Nooney, chair of the Realtors commercial alliance committee.Vacancy rates in the retail sector will probably edge up to 9.3% in the fourth quarter from 9.2% in the fourth quarter of 2007. Average retail rent is expected to rise 1.3% in 2008, compared with a 2.9% gain last year. Retail transaction volume during the first four months of 2008 totaled $7.5 billion, significantly below the $27.7 billion in the same period last year. Strip center transaction volume is down 77% from a year ago.

Investment in commercial real estate during the first four months of 2008 was $48.2 billion, down 69.5% from $157.8 billion during the same period in 2007 when the credit markets were functioning normally (those totals do not include transactions valued at less than $5 million or investments in the hospitality sector), NAR reports.

Chris' comments: It looks to me like we are going to see a continuing series of reports just like this one as all types of real estate in the U.S. take their medicine from the over-leveraging that has occurred in just about every segment of the U.S. economy. The solution is one that has to evolve over time. Until bank balance sheets recover to historic levels of normalcy and the consumer begins to do the same, the psychology of the market will remain negative, reinforcing the obvious caution that has enveloped economic activity and causing this "correction" to continue it's deliberate pace.