Commercial Real Estate Headed for Downturn

Commercial real estate is finally joining the party. Even though there has been no meaningful overbuilding in commercial real estate, the outlook for the industry has seriously dimmed. The retail and office sectors have turned down with vacancies rising. And the industrial sector is not far behind. A tightened credit market and a slumping economy are to blame.

Investment in com­mercial real estate has dried due to the ongo­ing credit crisis. In addi­tion large job losses and deteriorating consumer confidence have severe­ly impacted the demand for commercial space. Commercial property prices fell in 2008 and are projected to fall fur­ther in 2009. Each sec­tor in commercial real estate has been hard hit by these factors.

Office Sector

The office sector has been one of the hardest hit com­mercial sectors due to the recession. Rents are expected to decline in 2009 because of decreased demand for office space. Vacancy rates are projected to rise sig­nificantly throughout the year. Detroit and Phoenix are expected to have the highest vacancy rates while New York and Honolulu are expected to maintain the lowest vacancy rates.

Retail Sector

Plummeting consumer confidence and severe job loss­es has led to a serious drop off in consumer spending, negatively impacting the retail sector. Retail vacancy rates are rising dramatically in this sector and it will get worse during the first half of this year with the economy dropping deeper in recession. Retail rents are also ex­pected to decline throughout the year for the same rea­sons as rising vacancy rates. San Francisco and Hono­lulu are expected to have the lowest vacancy rates while Detroit and Colum­bus, Ohio are expected to have the highest vacancy rates.

Industrial Sector

The industrial sector is expected to slow consid­erably during the first half of this year due to a con­tracting manufacturing sector. Relatively healthy export growth during last year kept the industrial sector from caving in to the recession, but they will not be the case this year with a global recession on the way. Industrial vacancy rates are expected to rise throughout the year. The markets with the lowest vacancy rates are expected to be Los Angeles and Salt Lake City while the markets with the highest vacancy rates are expected to be Detroit and Phoenix. Industrial rents are also ex­pected to drop throughout the year.

Multifamily Sector

The other side of the residential housing coin is the multifamily sector. If households do not purchase homes, they still have to live somewhere, so they rent. Thus, the multifamily sector usually benefits from fall­ing home sales. That has certainly been the case for the apartment marketplace. Vacancy rates are projected to remain relatively low throughout the year, hovering around 6 percent. Similarly, rents are expected to grow around 2.5 percent this year. San Diego and Boston are expected to have the lowest vacancy rates while Or­lando and Phoenix are expected to have the highest va­cancies during the year.

The reversal of fortune in the commercial real estate in­dustry has led some of the nation’s biggest commercial real estate companies to ask the government for help. Trade association executives for the industry with some of their largest members have met with President-elect Obama’s transition team, Congressional leaders, and Treasury and Federal Reserve officials to make their case for assistance. The industry claims that in the next three years, an estimated $530 billion of commercial mortgages will come due for refinancing (with about $160 billion due this year). They claim that with the credit markets virtually collapsed, many of those prop­erties could go into foreclosure or bankruptcy if own­ers are unable to get new loans. Sounds like a familiar problem. The commercial sector will have to stand on line with cup in hand like so many other industries.