Credit Crunch, Economy Hurt Commercial Sector

Credit Crunch, Economy Hurt Commercial Sector

The general economic downturn, complicated by a severe credit crunch in commercial real estate, is dampening commercial real estate activity. In addition, a forward-looking index shows the forecast for commercial real estate sectors will remain weak for the remainder of the year, according to the NATIONAL ASSOCIATION of REALTORS®.Lawrence Yun, NAR chief economist, said commercial real estate has been hit by a double whammy.

“Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity,” he said. “It is critical for the Federal Reserve to increase liquidity by purchasing commercial mortgage-backed securities. Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound.” Declines in Commercial IndicesThe Commercial Leading Indicator for Brokerage Activity fell 4.8 percent to an index of 103.5 in the first quarter from a downwardly revised reading of 108.7 in the fourth quarter, and is 12.9 percent below the 118.8 recorded in the first quarter of 2008. NAR’s track of the commercial leading indicator dates back to 1990.The weakening index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, can be expected to decline over the next six to nine months. The Society of Industrial and Office REALTORS®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 600 local market experts, also indicates a lower level of business activity in upcoming quarters. More than 90 percent of respondents believe it is a tenant’s market, with many tenants benefiting from moderate to deep discounts in office and industrial rental rates, as well as landlord concessions.The SIOR index has declined for nine straight quarters and stood at 42.3 in the first quarter, well below the 100 point criteria that represents a balanced marketplace.REALTORS® Commercial Alliance Committee chair Robert Toothaker said data for commercial mortgage-backed securities are very telling.

“We went from $230 billion in CMBS issued in 2007 to only $12 billion in 2008,” he said. “Thus far in 2009 the number is essentially zero – liquidity in commercial credit is crucial to prevent damage to the broader economy. We need better policies and progress in accounting rules to facilitate lending.”Overall, commercial vacancy rates are rising and rents are softening, according to NAR’s latest Commercial Real Estate Outlook. 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.Overall Economic OutlookThe gross domestic product is expected to contract 2.9 percent this year, then grow 1.4 percent in 2010. Similarly, the consumer price index is forecast to decline 0.8 percent in 2009 before rising 1.7 percent next year.The unemployment rate is projected to average 9.5 percent this year and 10.2 percent in 2010. Inflation-adjusted disposable income is likely to grow 1.3 percent in 2009 and 1.1 percent next year.“Although we expect the economy to begin to stabilize later this year, unemployment will probably peak at about 10.5 percent around the end of 2009,” Yun said. “The job picture should gradually improve as 2010 progresses, but the fundamentals in commercial real estate won’t stabilize until somewhat later and will depend on the Fed’s actions.”Office MarketThe office sector is suffering the most from job losses, which continue to reduce demand for space. Vacancy rates are projected to increase to 16.1 percent in 2009 from 13.4 percent last year, and rise to 20.4 percent in 2010. Annual rent in the office sector is forecast to fall 7.2 percent this year and 0.8 percent in 2010 after a 0.4 percent decline last year. 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 as a negative 81.7 million square feet in 2009 and a negative 115.0 million next year.Industrial Market The global economic slowdown is affecting the industrial sector, which had benefited from a demand for exports before the recent slump.

Vacancy rates in the industrial sector are estimated to rise to 11.9 percent in 2009 and 12.6 percent next year, compared with 10.4 percent in 2008.Annual rent is likely to fall 3.4 percent this year and 4.0 percent in 2010, after declining 0.8 percent in 2008. Net absorption of industrial space in 58 markets tracked should be a negative 51.0 million square feet this year, then a positive 23.2 million in 2010. Many obsolete structures remain on the market because construction in recent years was designed to meet customized needs of industrial clients.Retail MarketWith consumers reluctant to spend much in the current economy, the retail vacancy rate will probably rise to 12.1 percent this year and 15.8 percent in 2010 from 9.7 percent in 2008. Average retail rent is expected to fall 2.1 percent in 2009 and 1.5 percent next year; it declined 2.0 percent in 2008. Net absorption of retail space in 53 tracked markets will likely be a negative 38.6 million square feet this year and a negative 44.2 million in 2010.

Multifamily MarketThe apartment rental market – multifamily housing – has been doing better than other commercial sectors, but a gain in home sales during the second half of this year will modify demand. Multifamily vacancy rates are forecast to rise to 6.8 percent in 2009 and 6.7 percent next year from 5.7 percent in 2008.Average rent should grow 1.5 percent this year and 2.5 percent in 2010, following a 2.9 percent gain in 2008. Multifamily net absorption is projected at 133,000 units in 59 tracked metro areas in 2009 and 89,700 next year.

Source: NAR