CBRE’s Torto Sees CRE Correction, No Catastrophe

More pain is in store for the U.S. commercial real estate market and the for the rest of the year, but reports of a meltdown are greatly exaggerated. That is the conclusion of CB Richard Ellis Inc.’s global chief economist, Raymond Torto (pictured), in a mid-year report. Difficulties in areas ranging from the job market to CMBS that will take time to resolve. Still, the economy should avoid the severity of the doldrums a generation ago, Torto argued. “We feel the headlines do not accurately reflect U.S. or global real estate fundamentals,” the report states. A generation ago, 12 months of job losses more severe than this year’s pounded the economy, followed by another 9 months of flat growth. Job losses will continue nationwide for the next three to six months; however, the slump in the employment market will not reach the scale of the early 1990s crisis. Indeed, considering the adjustments experienced by the housing, auto, and airline industry, “it is surprising that the job losses to date have not been greater,” the report states.The short-term outlook for commercial real estate is comparable to the job market’s: a relatively shallow, if extended weakening. Commercial real estate is already reflecting the softening of the economy. Second-quarter vacancy rates are up 50 to 100 basis points year-over-year nationwide. In the industrial sector, for example, vacancy for the markets tracked by Torto Wheaton Research, an affiliate of CB Richard Ellis Inc., rose from 9.3 percent to 10.3 percent since the second quarter of 2007. Office vacancy is at 13.2 percent, up from 12.5 percent a year ago. For the rest of the year, vacancy will continue to rise and absorption will dip into the negative across property types. Another indication of the downturn’s shallow nature is economic rent, which Torto defines as a measure of the change in a property’s gross income. That metric is expected to dip only 1.2 percent during the current downturn, a much lower drop than either the 6.1 percent falloff registered in the 1990s or the 23.4 percent slide tallied in 2001. Meanwhile, strong cash flows are keeping a lid on CMBS delinquency rates, which are less than one-half of one-percent for all property types.