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.
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.
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.
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.
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.