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Even before the financial meltdown last fall, most U.S. office markets were going noticeably soft. In particular, vacancies were rising as businesses downsized, reorganized or otherwise felt skittish about committing to any new use of office space. Now that the worst recession in at least a generation is under way, what was once only a worrisome trend for U.S. office landlords is full-blown reality.
Few dispute that current conditions in almost every office market could be called a “tenants' market.” Tenants have the edge now, provided they themselves aren't beaten up so badly by the economy that they can't take advantage of that fact.Though each major metro market has its own distinct features, the overall numbers are telling. According to Reis Inc., the overall U.S. office vacancy rate climbed to 15.2 percent by the end of the first quarter of 2009, compared to 14.5 percent at year's end 2008 and 12.8 percent during 1Q08. Office-space users vacated nearly 25 million square feet during 1Q09, moving in tandem with the spike in the U.S. unemployment rate during that period. People go, then the space goes, and people are still going.Moreover, since commercial real estate tends to be a lagging indicator, even if the economy starts to grow again later this year--something of a tall assumption--office landlords might not feel the benefit for quite a while longer than that. In some ways, this office downturn is like previous ones, Bill Lichwala, president and CEO of Plante Moran Cresa told CPN. “Financially solid tenants are now able to negotiate with a lot of strength,” he said. “At first, landlords resisted lowering rents, and offered more concessions, because lower rents affect the building valuation a lot more.”But now rents are going down. According to Reis, office rents were an average of 3.2 percent lower in the first quarter of 2009 than a year earlier. “Landlords simply can't compete anymore without competing on rents,” said Lichwala, whose Southfield, Mich.-based firm specializes in tenant rep. “They can only offer so much in the way of incentives, and that's reached its limit.”Lichwala pointed out that in one way, however, this office market isn't like previous slumps in space usage. “Previously, landlords needed to be sure that a tenant was creditworthy before a deal would be inked,” he said. “That's normal due diligence, and it hasn't changed. But now tenants need to be as sure of the solvency of the landlords as much as the other way around. It isn't any good to negotiate a sweet concession package if the landlord goes into receivership and can't afford it.” By: Dees Stribling, Contributing Editor of CPN.com
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Commercial real estate values are continuing their downward spiral, dropping 8.6 percent in April, according to a report released Wednesday by Moody's Investors Services and Real Estate Analytics.
That's the largest one-month nationwide decline on record. And the Southern region of the U.S., which includes Texas, is seeing the worst declines. Prices for investment properties in the Southern sector of the country are off more than 20 percent in the last year, Moody's researchers said.
U.S. commercial real estate values are down 29.5 percent from their peak in late 2007. "The question is will this mark the bottom or not," said Neal Elkin of Real Estate Analytics. The biggest declines have come in the office sector, where prices are down about 29 percent nationwide from a year ago. And shopping center values have fallen 18.5 percent. Another recent commercial property report predicts that the Dallas area will have the largest decline in office prices in the country during the coming year. That forecast last week by PricewaterhouseCoopers predicts that the commercial real estate market won't begin to recover until 2011.
Some industry watchers are even more pessimistic. The top analyst for Deutsche Bank's Commercial Mortgage Backed Securities operation predicted last week that the U.S. property market won't recover until 2017. "We are currently in something which is comparable to what we saw in the 1990s and potentially worse," Richard Parkus said at a New York real estate summit sponsored by the Reuters news agency. By STEVE BROWN / The Dallas Morning News stevebrown@dallasnews.com
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SpacePlace.net - Commercial Real Estate 2.0 Bailout News
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NEW YORK (Reuters) - Brazil, Russia, India and China move over. There's another emerging market for commercial real estate opportunities.
"Now that the meltdown has happened, the new emerging market is the United States," Tom Shapiro, president of real estate investment firm GoldenTree InSite Partners, said on Tuesday at the Reuters Global Real Estate Summit in New York.
The U.S. commercial real estate crash, in which prices are down more than 20 percent and are expected to fall 40 percent to 50 percent, has created a landscape of what is expected to be a land of vast opportunity for those with cash.
"I think there's going to be the best opportunity to make money in the last 20 years in real estate in the U.S.," Shapiro said.
GoldenTree InSite stopped investing in U.S. real estate in early 2006 and has focused most of its attention and cash on Brazil, where it has invested in residential and office properties.
But with about a $1 billion to use, it is poised to return to the U.S. market and take advantage of the right projects that need or will need money when they come up short.
"We are just at the point now where we are seeing some very interesting entry points on certain transactions," he said.
New York-based GoldenTree InSite is an opportunistic real estate company that invests funds raised from pension funds and other institutional investors.
Shapiro said his firm not only considers location but places more weight on the merits of an individual project.
"We're more about finding the right project in the right location," he said. "We're not looking for shotgun shots. We're looking for rifle shots."
Still, Shapiro said his firm likes big cities, such as Los Angeles and New York where downtrodden commercial real estate markets tend to rebound strong.
"San Francisco right now is a pretty interesting place to think about because San Francisco is a very diversified economy," he said.
He also mentioned residential land and hotels are of note because they are bottoming out.
"There's a lot of projects, whether it be development or operating properties, or properties that need to be renovated that were done with the best of intentions but relied on increasing fundamentals, rents working and not having construction overruns," Shapiro said.
GoldenTree InSite has not yet committed any funds to a new U.S. investment. It is not only evaluating what project to invest in, but how to enter the deal -- via equity, mezzanine financing or by buying distressed senior mortgages. Depending on the position of the financing, investment could be bought at 20 cents or 30 cents on the dollar.
For U.S. investing, GoldenTree InSite is likely to add leverage to its existing capital but will use it carefully, Shapiro said.
(Reporting by Ilaina Jonas; editing by Carol Bishopric)
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Commercial real-estate prices fell 8.6% in April as deals were closed after having been negotiated during the dark days of late 2008 and early 2009, Moody's Investors Service said.
"The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real-estate markets," says Moody's Managing Director Nick Levidy. He added more distressed sales appear to be occurring.
The monthly decline, which leaves prices down one-quarter from a year earlier, continues the losing streak for the commercial real-estate sector, which had held out longer than residential real estate. However, commercial real estate began to feel the recession late last year, as retailers and other businesses cut back when financial markets and consumer sentiment were plunging.
Overall sales volume also fell sequentially in the month to 285, the lowest level since Moody's began tracking the figures in 2000.
By region, apartments are holding up the best in the East, down 12%. The South, the worst-performing region over the past year, saw declines of more than 20% in all sectors.
The three major office markets - New York, San Francisco and Washington - suffered declines as well, with Washington posting the biggest year-over-year fall at 21%. New York and San Francisco had declines of 13% and 20%, respectively.
-By Jay Miller, Dow Jones
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The state of commercial real estate has become a growing concern for the economy. Martin Cohen, chairman and co-CEO of Cohen & Steers Capital Management, shares his outlook for the sector.
They call this the Motor City, but you have to leave town to buy a Chrysler or a Jeep. Borders Inc. was founded 40 miles away, but the only one of the chain's bookstores here closed this month. And Starbucks Corp., famous for saturating U.S. cities with its storefronts, has only four left in this city of 900,000 after closures last summer.
There was a time early in the decade when downtown Detroit was sprouting new cafes and shops, and residents began to nurture hopes of a rebound. But lately, they are finding it increasingly tough to buy groceries or get a cup of fresh-roast coffee as the 11th largest U.S. city struggles with the recession and the auto-industry crisis.
No national grocery chain operates a store here. A lack of outlets that sell fresh produce and meat has led the United Food and Commercial Workers union and a community group to think about building a grocery store of its own.
One of the few remaining bookstores is the massive used-book outlet John K. King has operated out of an abandoned glove factory since 1983. But Mr. King is considering moving his operations to the suburbs.
Last week, Lochmoor Chrysler Jeep on Detroit's East Side stopped selling Chrysler products, one of the 789 franchises Chrysler Group LLC is dropping from its retail network. It was Detroit's last Chrysler Jeep store.
"The lack of retail is one of the biggest challenges the city faces," said James Bieri, president of Bieri Co., a Detroit-based real-estate brokerage. "Trying to understand how to get it to come back will be one of the most important keys to its resurgence -- if it ever has one." Detroit's woes are largely rooted in the collapse of the auto industry. General Motors Corp., one of downtown's largest employers and the last of the Big Three auto makers with its headquarters here, has drastically cut white-collar workers and been offered incentives to move to the suburbs. Other local businesses that serviced the auto maker, from ad agencies and accounting firms to newsstands and shoe-shine outlets, also have been hurt. The city's 22.8% unemployment rate is among the highest in the U.S.; 30% of residents are on food stamps.
"As the city loses so much, the tax base shrinks and the city has to cut back services," said Margaret Dewar, a professor of urban planning at the University of Michigan. That causes such hassles for retailers as longer police-response times, as well as less-frequent snow plowing and trash pickup.
While all of southeast Michigan is hurting because of the auto-industry's troubles, Detroit's problems are compounded by decades of flight to the suburbs. Hundreds of buildings were left vacant by the nearly one million residents who have left. Thousands of businesses have closed since the city's population peaked six decades ago. Navigating zoning rules and other red tape to develop land for big-box stores that might cater to a low-income clientele is daunting. The lack of grocery stores is especially problematic. The last two mainstream chain groceries closed in 2007, when The Great Atlantic & Pacific Tea Co. sold most of the southeast Michigan stores in its Farmer Jack chain to Kroger Corp., which declined to purchase the chain's two Detroit locations, causing them to close.
A 2007 study found that more than half of Detroit residents had to travel twice as far to reach a grocery store than a fast-food outlet or convenience store. Michelle Robinson, 42 years old, does most of her shopping at big-box stores in the suburbs. When visitors staying at the hotel near her downtown office ask where to shop, she sends them to a mall in Dearborn, 12 miles away. A few retailers are thriving. Family Dollar Stores Inc. has opened 25 outlets since 2003. A handful of independent coffee shops and a newly opened Tim Horton's franchise cater to workers downtown.
Discount grocer Aldi Inc. opened stores in the city in 2001 and 2005. A spokeswoman said the chain is "very bullish" on Detroit. Farmer's markets draw crowds looking for fresh produce. Olga Stella, an official at the Detroit Economic Growth Corporation, works to persuade businesses to move to the city. She says companies have underestimated Detroit's economic potential and that Aldi and Family Dollar are proof there's money to be made here. Meanwhile, the former Lochmoor Chrysler Jeep is now Lochmoor Automotive Group, a used-car dealership and repair shop. Gina Russo, daughter of the dealer's longtime owner, is being groomed to take over the family business. She has agreed to start selling small pickup trucks made by India's Mahindra & Mahindra Ltd.
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WASHINGTON -(Dow Jones)- Some lawmakers welcomed news Tuesday that 10 of the nation's largest banks are poised to repay billions of federal assistance but warned that a "ticking time bomb" in commercial real estate could deal a punishing blow to lenders and the economy. "I am very concerned about the ticking time bomb we face in commercial real estate lending," congressional Joint Economic Committee Chair Carolyn Maloney, D-N.Y. said at a hearing Tuesday. She noted that an estimated $400 billion of commercial real estate loans are coming due this year, with another $300 billion due in 2010.
If commercial real estate developers cannot refinance or pay off that debt, " we could expect to see the default rate on commercial mortgages climb much higher," Maloney warned. Maloney's comments came at a hearing into the $700 billion Troubled Asset Relief Program approved by Congress to help banks saddled with soured assets linked to risky home mortgage loans. Just before the hearing began, the U.S. Treasury Department announced that 10 recipients of so-called TARP funds will repay a total of $68 billion, which Maloney called "welcome news."
The hearing follows the release of a new Congressional Oversight Panel report on the TARP, which faulted recent "stress tests" of 19 large financial firms by the Treasury Department and the Federal Reserve, saying the economic assumptions probably were too rosy and that the projections only run through 2010.
"We simply are asking for more," Congressional Oversight Panel chair Elizabeth Warren told lawmakers. She recommended that the stress tests be run again, with tougher assumptions, and be continued as long as banks hold troubled assets.As a case in point, Warren noted that the U.S. unemployment rate projected for 2009 under the stress tests' "worst-case scenario" was 8.9%, but "we're now at 9.4%,"
"This is a real concern, the worst case scenario in 2009 is in fact not the worst case," said Warren, whose panel is monitoring the Treasury's spending of the bailout money. In addition, the oversight panel called for regulators to issue more information about the stress-test methodology, allowing outside analysts to replicate the tests themselves. -By Judith Burns, Dow Jones Newswires
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NEW YORK (Reuters) - The default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.
During the first quarter 2009, the national default rate for commercial real estate mortgages held by regulated depository institutions rose to 2.25 percent from 1.62 in the fourth quarter of 2008, according to the real estate research firm's report released on Tuesday. The 0.63 percentage-point jump is the largest quarterly increase since at least 1992, and pushed the default rate to its highest level since 1994, the New York-based firm said. The default rate does not include loans on apartments, which increased by 0.68 percentage points between the fourth quarter and first quarter 2009 to 2.45 percent. The analysis of the data from the Federal Deposit Insurance Corporation (FDIC) includes non-farm, non-residential property where the primary source of repayment during the term of the mortgage is derived from the property's rental income. The multifamily results include buildings with five or more units.
Depository institutions hold about half the $3.2 trillion in debt on U.S. commercial property, with the commercial mortgage-backed securities market accounting for about 25 percent of that. Insurance companies and government-sponsored entities such as Fannie Mae account for the remainder.
Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations. Additionally, those borrowers who had been current were not able to refinance or sell their properties in order to meet balloon payments required by maturing mortgages because of the tight lending markets. Mortgages originated in 2006 and 2007 experienced the most significant cash shortfalls because of the large number of mortgages that were based on overly aggressive rent and occupancy projections.
"Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate, while others are lending only with existing relationships," the report said. Real Estate Econometrics also revised its default projections higher. It sees the default rate rising to 4.1 percent by the end of the year, up from its prior forecast of 3.9 percent. By the end of 2010, the default rate is expected to rise to 5.2 percent, up from the prior outlook of 4.7 percent.
It expects the default rate for U.S. commercial loans held by banks to peak at 5.3 percent in 2011, up from its forecast of 4.8 percent. The more sour forecast was due chiefly to a more pessimistic outlook for the overall economy, a projected rise in long-term interest rates and a slower-than-expected policy response to commercial real estate credit constraints. It sees the national default rate for multifamily mortgages is projected to rise to 4.5 percent in the fourth quarter of 2009 and peak at 5.5 percent next year. ~ Reporting by Ilaina Jonas, editing by Matthew Lewis (Reuters)
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NEW YORK (Fortune) -- Despite near universal criticism of their many missteps during the credit bubble, the ratings agencies aren't irrelevant just yet. Commercial real estate investors discovered as much last week, when an announcement by Standard & Poor's doused the spring rally in the beaten-down market for commercial mortgage-backed securities, or CMBS.
S&P's move left commercial property investors scratching their heads over the ratings agency's timing. The proposal, in which S&P warned it may soon downgrade hundreds of recent bond issues, could complicate a new federal plan to make financing more available for office buildings, apartment complexes and shopping malls.
Investors also wondered about S&P's change in tone on the prospects for the senior-most commercial real estate-backed debt securities. The ratings agency and its rivals Moody's (MCO) and Fitch have been under fire in Congress for their failure to alert investors to the housing bubble, and some observers wonder if they aren't hastily trying to make amends. "They've spent 18 months getting raked over the coals for being too lenient, and now they appear to be oversteering," said Steve Jernigan, a director at NewOak Capital, an advisory, asset management and capital markets firm in New York.
S&P says politics aren't influencing ratings actions. "Our ratings are driven only by our best analytical judgment of the creditworthiness of the issuers and securities we rate and are formed independent of other concerns," spokesman Ed Sweeney said in an email. He added that S&P's comments last week reflect its "careful review and analysis of the current CMBS market and our expectations for it going forward." ~ By Colin Barr, senior writer at Fortune.com
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I wanted to update each and everyone of you on the activity we have been going through internally this week. If you have recently been to www.spaceplace.net, then you will notice we have are now active in Twittering...or is it Tweeting? Who knows? But we are live and working and I invite each of you to follow us as we will continue to give updates on site development progress, site features, launch date plans, and a bunch of other things that we work through on a daily basis. Also, we are now on Facebook! We love hearing from each of you... so please leave comments.
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Commercial real estate may soon bulldoze the green shoots.
A coming wave of defaults on loans to developers of condominiums, office buildings and malls could do significant damage to the already deflating economy. That was the overwhelming concern expressed at a public hearing of the Congressional Oversight Panel on Thursday that focused on corporate and commercial real estate lending.
The COP was set up last fall as part of legislation that gave the Treasury Department permission to spend $700 billion to rescue the nation's ailing financial system. The panel, which is headed by Harvard Law professor Elizabeth Warren, has no legislative or official regulatory powers. It is supposed to monitor the Treasury's spending and report back to Congress as to whether it is being effective in boosting lending, and shoring up the financial sector.
Thursday's hearing was one of a number of public forums the COP is hosting on different segments of the lending market. Warren is often criticized for being too critical of banks and their lending practices. But at the hearing on commercial real estate Warren focused on how big a problem future loan defaults will be and what should be done about it.
She got an earful. Richard Parkus, an analyst at Deutsche Bank, said he thought two-thirds of all commercial real estate loans due in the next few years, hundreds of billions of dollars worth, could go bust. Jeffrey DeBoer, president of trade group The Real Estate Roundtable, fretted that problems in the lending business could cost the nation thousands more construction and real estate jobs. Next up, Congressman Jerrold Nadler of New York expressed worry that the country was headed for a lost decade of economic stagnation.
There were not a lot of solutions offered. Nadler said he thought the government should create new banks. Those banks, unencumbered by souring loans, would boost lending. Nadler said he thought private investors would be interested in helping to fund the new banks. A number of the panelists thought the government's TALF and PPIP programs meant to boost lending were helpful, but not the answer. Parkus said he thought extending terms of commercial loans set to default would only delay the problem and make it worse. As more and more bad loans pile up, he predicted, it will become progressively harder for any of them to get refinanced.
What was clear from the hearing is that commercial real estate could turn out to be a much bigger problem for banks and the economy than the Treasury Department, the Federal Reserve and other bank regulators seem to believe. "The question is what percentage of commercial real estate loans will have trouble refinancing," Parkus said at the COP hearing. "It is likely to be a big problem."
How big? In the government's recent bank stress test, examiners predicted that commercial real estate loan losses for the 19 largest banks in the nation would be far lower than the value of home loans that go unpaid in the next two years--$53 billion versus $185 billion. But Warren said she thought the two-year horizon of the government stress test may have understated the size of the banks' commercial real estate problem. The government assumed different default rates for each of the 19 banks for commercial real estate and other types of loans. Warren said the government had not given much information as to what determined the default rate used for each bank; she plans to release a report on the stress test in early June.
Parkus concurred that the stress tests probably went too light on potential losses. He expects that a little over a $1 trillion in commercial real estate loans will be up for refinancing in the next four years. Because of falling real estate prices and lower rental incomes, he said, as many as two-thirds of those loans may not be eligible for refinancing and could end in default.
Kevin Pearson, executive vice president of M&T Bank, said he thinks banks will be able to avoid many of those loan losses through loan modifications, or "through blocking and tackling," as he put it. Parkus, though, said that outlook was too positive. He countered that banks will have a very tough time refinancing the poor loans they made at the height of the credit bubble. "There are very large losses embedded in the system," said Parkus.
Commercial Real Estate — the Economy's Anvil By Stephen Gandel
Tom Howorth is feeling the impact of the crumbling real estate market. The Oxford, Miss., architect's firm has dwindled from 18 people to 11 since mid-2007 as clients have postponed or canceled major projects. The situation appears to be getting worse. Colleagues in other parts of the country, who had been faring better, now tell Howorth they are also starting to see a steep drop in business.
"People have lost confidence," says Howorth, a principal at Howorth & Associates Architects. "Whether it's a church that doesn't know what their membership is going to be able to do (with its building fund) … to universities whose endowments have taken a huge hit, to individuals who are saying, 'Look at what's happened to real estate values,' to developers who aren't even thinking about spending money in this economy."
Contractors, investors and developers are bracing for what could be the worst real estate crunch since the early 1990s, when the industry built a small city's worth of speculative office buildings that later went begging for tenants. Commercial property sales plunged 73% last year, according to Real Capital Analytics. Vacancy rates are rising, and hundreds of large properties are in default. The American Institute of Architects' billing index, a leading indicator of construction six months ahead, is at a record low. Unemployment in the construction industry is 15.3%, well above the average 7.2% jobless rate.
The 1990s crisis was sparked by federal tax breaks that encouraged overinvestment and overbuilding. This time around, the real estate frenzy was fueled by cheap credit, which allowed investors and developers to bid up prices of existing properties. But the economic fallout could be similar: rising bankruptcies and unemployment and slower economic growth at a time when the economy is already reeling from a historic housing depression.
"This is a rolling problem that's only going to get worse," says Jeffrey DeBoer, president of the Real Estate Roundtable, estimating that about $400 billion worth of commercial real estate mortgages will come due by the end of 2009. Investors and developers might have trouble refinancing many loans, due to tight credit and falling rents and property values. "Businesses need to be able to access the credit market when their debt comes due and their business needs require. Right now, they're not able to," DeBoer says.
The Roundtable is part of an industrywide coalition that's pushing the Federal Reserve and Treasury Department to create a special lending program to resuscitate the commercial mortgage-backed securities market. The industry says such a move would provide liquidity and restore confidence to a sector of the credit market that has essentially frozen. The Treasury Department and Fed have not issued a formal decision, but Treasury noted in November that a similar program aimed at auto, credit card and student loan lenders could be extended to include commercial mortgage-backed securities.
In a recent analysis, Citigroup noted that the sharp drop in the commercial mortgage-backed securities market is putting more pressure on banks, forcing them to extend existing loans. But the Citigroup analysts said that problems are well below the levels of the 1990s, and that banks should be able to manage the commercial mortgage-backed securities that are coming due. Though the problems in the non-residential sector of the real estate market aren't likely to be nearly as calamitous as the housing market collapse, they could contribute to a deeper and longer recession. The non-residential real estate decline could shave about a third of a percentage point, or $30 billion, from U.S. economic growth in 2009, says Aaron Smith, senior economist at Moody's Economy.com.
Banks held more than 50% of commercial real estate loans in the second quarter of 2008. Smaller, regional lenders have a relatively larger exposure to the commercial real estate market than large money-center banks, Smith notes. The charge-off rate for such loans is about 1.1% but is quickly rising.
Government regulators moved to tighten standards for commercial real estate lending several years ago as the market heated up. The Fed, for example, imposed more stringent guidelines for banks that had a large concentration of commercial real estate loans. Some lenders that initially fought the move now say it was helpful. But they also say the current tough stance of bank regulators is making it hard for them to extend new credit and may be adding to market uncertainty.
"We've had situations where we've shown the (federal bank) examiners a particular appraisal on a property, but they've not accepted it and told us the property was worth less than the appraisal," says James McPhee, CEO of the Kalamazoo County State Bank in Michigan. "It's been difficult for us to get a handle of what is expected … with the devaluation of real estate, I think people are somewhat confused as to what values we dare use," says McPhee, currently vice chairman of the Independent Community Bankers of America.
How bad will it get? Robert Murray, vice president for economic affairs at McGraw-Hill, says the downturn will get worse in the coming year but may not end up being as dramatic as the 1980s and 1990s real estate implosion. The outlook depends on what happens to the overall economy. Office construction peaked at about 218 million square feet of new space in 2007, compared with a high of 350 million square feet during some years in the 1980s. With the exception of retail, "I don't really think there was overbuilding to the extent of the late '80s and early '90s," Murray says. "In the case of retail, it was partly due to (shopping malls) springing up where new housing developments grew; also a movement to open-air shopping centers."
Murray expects commercial real estate construction, measured by square footage, to decline by 24% or more in 2009, after falling an estimated 24% in 2008. The retail segment, stores and shopping centers, which fell 33% in 2008, will decline another 29% in 2009. Office space construction will plunge in 2009 by 26% — though Murray cautions that the office market is becoming increasingly vulnerable as unemployment rises. The hotel industry will move from a 3% dip in 2008, to a 30% drop in 2009.
Still, Goldman Sachs last week upgraded its outlook for hotel stocks. Noting a 70% increase in the number of hotel projects abandoned or deferred in the past 12 months, Goldman Sachs analyst Steven Kent said a more realistic supply outlook should help stabilize earnings for the industry.
Conditions differ regionally, though the pain is becoming widespread. Charles Hendricks, a partner at architecture firm The Gaines Group, says he still has enough work to carry his office through the first quarter of 2009, and possibly the first half. The six-person firm, with offices in Charlottesville, Va., and Harrisburg, Va., specializes in environmentally sustainable architecture, doing light commercial projects and residential work. "Our clientele is pretty well protected from the ebb and flow, and still moving forward," Hendricks says. "As the economy slows down … we're doing more renovation; people are staying in place."
Not the same view In Phoenix, it's a different story. The office vacancy rate in metropolitan Phoenix has climbed near 18%, the highest in the nation. The pain isn't ended yet, given that 3.9 million square feet of additional office space is under construction, says Elliott Pollack, who heads the Phoenix forecasting firm Elliott D. Pollack and Co.
Pollack expects the local office vacancy rate to climb to 20% next year. He expects Phoenix will post net job losses in 2009 after shedding jobs this year. That would be the first time employment has fallen in the area for two consecutive years since the 1950s.
"When things clear up, as they invariably will, you will see Phoenix grow out of it," Pollack says. "There will be an extended period where there is little new office construction. There was virtually none for four years in the early 1990s; it could easily take three or four years this time, as well."
Overall, the U.S. office vacancy rate increased to 11.7% in the second quarter of 2008, according to CoStar, a Bethesda, Md.-based firm. That's the third quarterly increase in a row, and the highest vacancy rate since 2005.
Detroit had the second-worst performance behind Phoenix, with a 17.2% vacancy rate. Oklahoma City, by contrast, had some of the lowest numbers, with an 8.3% vacancy rate. But the outlook depends on whether the economy starts to stabilize by midyear, as many economists forecast, or deteriorates more than expected.
Huge retailers, including Target, Best Buy, Home Depot and Lowe's, have scaled back on new construction and closed existing stores, while others, such as Linens 'n Things and Circuit City have filed for bankruptcy-court protection.
NAI Global, a major real estate leasing and financing firm, noted an increasing number of empty downtown storefronts, with vacancy rates for such properties rising by 14%, to 7.5% in 2008. Still, the national average rental rate for downtown retail space rose 7% last year. The national average rental rate for regional malls fell 21%, and the vacancy rate nationwide increased by 15% to 5.6% in 2008.
"We believe we will see further erosion in all sectors before vacancy rates and rental rates stabilize in late 2009 or early 2010," said Jeffrey Finn, president and CEO of NAI Global. Finn says he hopes President-elect Barack Obama's emerging economic stimulus plan will revive the economy and consumer confidence. Some firms are hoping for even more immediate assistance.
As the housing and commercial real estate sectors have slowed, construction firms have relied on public works projects such as bridges and schools to stay busy. A number of those projects are being mothballed as states and cities struggle to balance their budgets in the face of declining tax revenue.
"Arizona has a (budget) shortfall, so they are starting to put state-funded or tax-funded projects on hold. We have a couple ready to start construction that are on indefinite hold, and we don't know what indefinite means," says J. Doug Pruitt, chairman and CEO of Sundt Construction in Tempe, Ariz.
Pruitt's firm, which also does work in California and other states, says that if conditions don't turn up soon, he'll have to start thinking about layoffs at his company. He and others in the construction industry are pushing Congress to quickly approve hundreds of billions of dollars in new public works spending, including bridges, roads and schools, to tide workers over until the economy recovers.
Lately, there has been a wealth of information concerning the health and state of the Commercial Real Estate industry and the article posted today is no different, but at SpacePlace.net, we feel it is vitally important that our members are kept up to date with the most current information available. We promise not every post will be about the impending doom of CRE, but enlight of all the new information, we feel it is critical to our members to share what others around the country are saying. Check out the latest article below!
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Even if rents and vacancies don't totally collapse, the commercial real estate market may be in for violent upheaval, if only because there isn't enough available credit to deal with all the re-financings. The New York Post runs down some of the grim numbers: At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation -- the lion's share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.
Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression -- because they can't refinance the debt. The commercial debt securitization market is dead. "Because there is no securitization the system cannot process the wave of maturities coming due," said Scott Latham, commercial property broker at Cushman & Wakefield.
"This is arguably the most important fact we're going to be dealing with. If there's no mortgage market that can feed the machine you're just not going to have deals," he said. "It's going to be years before we recover and even when that happens we're going to discover that we're in a new paradigm," Latham added.
About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone. From what we've heard, it's impossible to overstate how stingy commercial real estate lenders have become. Even projects with very solid tenants and no indication of a drop-off are having a hard time rolling over their debt. Still, there's a difference between a homeowner going into foreclosure and a commercial real estate owner that still has paying tenants. Whoever receives the property will still be seeing cash flow, and there's a good chance it will have some value, rather than some house in the middle of nowhere, with no prospects of being sold, whose only realistic fate is a bulldozer. ~ By Joe Weisenthal of Clusterstock.
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Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the United States, sometimes forcing cut-rate auctions of landmark skyscrapers. Developers are falling behind on mortgages as tenants leave and can find no financing to cover payments.
So they are selling skyscrapers at a drastic discount, with the condition that the new buyer take on the enormous amounts of debt connected to the properties. "Just imagine in a residential market, if there weren’t 80 per cent loans available for everyone. If everyone had to buy their houses in cash, the values of houses would plummet everywhere," said Dan Fasulo, a managing director at Real Capital Analytics. "That’s happening on a massive scale on the commercial side." The Hancock Tower and the Sixth Avenue building are the first of a wave of foreclosures and auctions expected in the next year that will slash sale values of formerly prime real estate.
"This is a train wreck that’s coming in the large office towers," said Matthew Haines, chairman of the Propertyshark.com real estate website.
Real Capital Analytics, which tracks commercial real estate transactions, counted over $86 billion worth of distressed properties in the country as of April, over $6 billion in Manhattan. Many of the towers that are likely to go up for sale were bought at inflated prices during the boom three to five years ago and could lose over half their value at sale.
The MIT Centre for Real Estate said last week that commercial property sales in the first quarter fell by six per cent from the end of last year, and were down 21 per cent down from the same period a year ago. And on Wednesday, the National Association of Realtors said its index of commercial brokerage activity fell almost 13 percent from a year ago.
Sales volume is "historically low. It has never been this low. It has never even been half this low," Geltner said (research director at MIT Centre of Real Estate).
The only major property sales that are likely in the next several months, analysts say, are distressed properties with delinquent loans.
"No healthy owner in their right mind would try to sell a property in this environment," said Fasulo. He said devalued sales of skyscrapers represent "a trickle right now. It will turn into a flood over the next 12 months." ~ By AMY WESTFELDT The Associated Press NEW YORK
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What is the state of the Commercial Real Estate industry ? When will the industry begin to recover? What is the formula for success? Top executives discuss these issues. Check out the link below!
SpacePlace.net ~ The Commercial Real Estate industry's definative source for searching, listing and connecting to commercial real estate properties, professionals, and market information.
The US government's pumping up of the economy via various programs created by the nearly $800 billion economic stimulus package and interceding in the financial market will indirectly incite the revival of the commercial real estate market, according to a new report by Marcus & Millichap Real Estate Investment Services. But the major impact is unlikely to be felt this year. The present state of the commercial real estate market leaves a great deal of room for improvement. Marcus & Millichap notes in its report that sales volume, restricted by the gap between buyers' and sellers' pricing, has barely made a blip on the radar within the last six months. While the pricing disparity showed some signs of improvement in the first quarter of 2009 due to declining property fundamentals and the ongoing general inaccessibility of debt capital, there remains the issue of the impending maturity of commercial mortgages with which the industry must contend.
Approximately $218 billion of commercial mortgages will come due this year, followed by $270 million between 2010 and 2011, so while commercial delinquency rates were relatively low as the economy headed downward, the lag effect will soon come into play. The CMBS delinquency rate increased in the first quarter and is on track to increase even further to the 4 percent to 5 percent range by the close of 2009. Banks could see the delinquency figure climb to $53 billion, as indicated by recent stress tests.
However, the aforementioned stress tests have also revealed that, with the new federal programs coming into play, capital should become more easily accessible, thereby eventually spurring an uptick in commercial real estate conditions, particularly since the majority of property sectors avoided overbuilding as the downturn approached. Yet, visible change in the commercial real estate market, will trail economic recovery by about six to nine months. Improvement is on the way, but the impact of the federal stimulus package and financial market intervention won't be felt at its strongest until after the year has come to a close. As Marcus & Millichap notes in its report, one can look to the apartment and industrial sectors, which are most sensitive to job creation and increased consumption, to show the first signs of recovery. By Barbara Murray, contributing editor to CPN Online
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So the U.S. commercial real estate sector declined at the beginning of the year, according to the National Association of Realtors, which said on Wednesday its index of brokerage activity in the sector fell 4.8 percent in the first quarter from the fourth. Activity was also 12.9 percent below the first quarter of 2008, NAR said. "Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity," said the association's chief economist, Lawrence Yun, in a statement.
Treasury Secretary Timothy Geithner said the keys are putting "more capital where it is necessary and getting the securities market back to the point where they can help refinance viable projects." The Federal Reserve has offered some relief by opening its $200 billion Term Asset Backed Securities Loan Facility to AAA-rated commercial mortgage-backed securities, he said. "The Fed announced yesterday a very important step that's going to extend this program to commercial mortgage-backed securities -- newly issued securities and legacy assets in that area," he said. "The market responded quite favorably because the availability of financing in those markets will help get those capital markets going again."
The NAR said commercial real estate activity, which encompasses the finished construction of buildings and their sale and leasing, will continue to decline for the next six to nine months. "Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound," Yun also said. The association, which represents 1.2 million professionals in residential and commercial real estate, projected that vacancy rates in office buildings will reach 16.1 percent in 2009, up from 13.4 percent in 2008, and will rise again to 20.4 percent in 2010. Retail vacancy rates will likely increase to 12.1 percent in 2009 from 9.7 percent last year, and will spike to 15.8 percent next year, the association said.
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According to the Wall Street Journal, in a worst case scenario analysis, roughly $100 billion of losses could hit smaller banks by the end of next year. The root cause of which are commercial real estate loans.
Taking at look at 900 small to midsize banks across the US, the Wall Street Journal estimates that commercial real estate loans pose a massive threat to the banks' livelihood. Using a similar process that was used on the 19 'big banks' in the Federal government's stress tests, the Journal is seeing danger from the loans in the commercial real estate sector.
The study estimates a worst-case scenario in which unemployment hits 10.3%, which also means that banks would do better if unemployment topped out at a more manageable 8.9%. The contrast in the smaller banks losses to some of the larger banks the government is examining, has as much to do with investor interest as anything else. Some of the smaller banks, the Journal asserts, may not find the same kind of opportunistic investing when these smaller institutions run into trouble, meaning there is a likelier chance of those banks going under should the recession stretch on, which will further tighten lending markets.
Stay tuned for the latest in CRE market information!
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SpacePlace.net ~ The Commercial Real Estate industry's definative source for searching, listing and connecting to commercial real estate properties, professionals, and market information.
Delinquency rates and defaults on office and retail buildings and hotels have more than doubled in just six months. For apartments and industrial buildings, the rates have increased more than 80 percent, according to Reis Inc.
While homeowners are defaulting at almost four times the rate of commercial landlords, the sudden spike in late payments has many industry insiders worried about the collateral threat to the economy and financial system. Nearly $73 billion worth of commercial real estate loans are in some level of financial distress, according to Real Capital Analytics.
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