Chandan: Economy to Contract Through 2009

The fiscal turmoil that continues to beleaguer the U.S. financial markets presents a lackluster near-term outlook: The economy is expected to shrink for the remainder of the year and during the first half of 2009 before experiencing just modest growth in late 2009 and in 2010, said Reis Inc. chief economist Sam Chandan, Ph.D., during the firm’s third quarter 2008 quarterly briefing. The number of job losses has grown markedly worse. The Labor Department last week announced that U.S. jobless claims rose by 32,000 to 516,000 for the week ended Nov. 8, its highest mark since September 2001. The weak labor market has had an undeniable impact on the multi-family sector. “The relative strengthening in apartment demand from the housing downturn has tempered but not completely offset the countervailing pressures from heightened price sensitivity among households and lower household formation rates that have resulted from declining incomes and these job losses,” Chandan said. The multi-family sector’s third quarter vacancy rate grew 10 basis points from 6 percent in the second quarter to 6.1 in the third quarter, a 40 basis-point jump from the same period a year ago. Asking rents and effective rents slowed to 0.6 percent growth in the third quarter, with both down from the 1 percent growth netted in the second quarter. The average asking rent for 2008 is expected to experience a 2.9 percent rise, down from the 4.4 percent increase in 2007. The average asking rent is forecast to increase 2 percent next year and 2.8 percent in 2010. The average effective rent for 2008 is projected to grow 2.7 percent, a drop from 2007’s 4.6 percent rise. Reis forecasts the 2009 change to be 1.7 percent and the 2010 change to be 2.8 percent. Tacoma and Seattle, San Francisco, Tulsa and Austin are the top markets by one-year rent growth, while New York City, the District of Columbia, San Francisco, Seattle and Nashville are the top areas when ranked by current quarter occupancy. Unsurprisingly, the office sector struggled in the third quarter. Negative net absorption, which was up more than -19 million square feet, coupled with 11.5 million square feet in completions, nudged the office vacancy rate from 13.1 percent in the second quarter to 13.7 percent in the third quarter–a 60 basis-point rise, the sector’s largest quarter-over-quarter increase since the second quarter of 2002. Of the 79 primary office markets that Reis evaluated, only 10 improved occupancy rates in the third quarter, compared with 45 from the same period a year ago. Detroit; Dallas; Dayton, Ohio; and Greensboro-Winston Salem, N.C., had vacancy rates that exceeded 20 percent, while Charleston, S.C.; San Bernardino-Riverside, Calif.; Tucson, Ariz.; and Hartford, Conn., reeled in the heftiest increases in vacancy rates. “The constraints on financing and the gloomier outlook for office space demand continues to weigh on prices in the sector,” Chandan said. In the retail sector, meanwhile, the average vacancy rate for neighborhood and community shopping centers increased from 8.1 percent in the second quarter to 8.4 percent in the third quarter, while the same measure for regional/super regional malls rose from 6.3 percent in the second quarter to 6.6 percent in the third quarter. For neighborhood and community centers in particular, the average vacancy rate will come in at 9.1 percent at the end of the year and 9.9 percent in 2009 before hitting the double-digit rate of 10.3 percent in 2010. Over the course of 2009, Tampa, Jacksonville, Cleveland and Phoenix will have the largest declines in effective rents. On the other side of the equation, Austin, Columbia, Portland, Tacoma and Seattle were the top markets in terms of rent growth from the third quarter of 2007 to the same period this year. “As recently as last summer, increases in vacancy rates, particularly for strip malls, were predominately attributable to retail development collocation with new housing communities,” Chandan said. “As the broader economy has slowed, however, the principal drivers of the slump in retail fundamentals has expanded to include weakening consumer activity as the dominant driver. The decline in home values has had a particularly powerful impact on consumers, since for a majority of U.S. households, home equity is a leading store of wealth.” Compared with the apartment, office and retail sectors, the U.S. industrial market has performed relatively well, Chandan continued, thanks largely to the nation’s major ports of entry and the weakening value of the U.S. dollar aiding exports. But industrial’s vacancy rate increased from 9.5 percent in the second quarter to 9.9 percent in the third quarter; the economic slowdown has hit global markets and year-over-year growth in combined imports and exports of goods and services have taken a hit. Overall, Chandan said that uncertainties dominate. “Some metros will fall to the downside of their current baseline projections for local economic growth [and] jobs, and as a result, projections for real estate demand will fall to the downside.”