Finding Something to Cheer About in a Temporary Soft Patch

By Bob Bach, Senior Vice President & Chief Economist, Grubb & Ellis Co.

The economy and the financial markets have lost some momentum over the past few weeks, but there are still some bright spots to lead us through the gloom such as the absence of new construction, the surge in dollar volume of property sales in the first quarter of 2012 and loosening standards for CRE loans.

By Bob Bach,
Senior Vice President & Chief Economist, Grubb & Ellis Co.

The economy and the financial markets have lost some momentum over the past few weeks softening retail sales, employment growth and industrial production combined with the once-unthinkable possibility that Greece will depart from the euro, all on top of the protracted (to put it kindly) housing slump. Stocks have sagged, and the 10-year Treasury note has fallen back below 1.8 percent, signaling that investors once again are shying away from risk.

Nevertheless, commercial real estate continues to recover at a steady pace, and there are a few bright spots that can lead us through the gloom.

Perhaps the saving grace for the industry has been the near absence of new construction. Net absorption, though not terribly strong with the exception of apartments, has been enough to move the vacancy needle lower across all property types for several quarters. U.S. office and industrial absorption in the first quarter totaled 10 and 28 million square feet, respectively. This compares with the quarterly average during 2007 (the last year of economic expansion before the Great Recession) of 15 million for office and 40 million for industrial.

The average asking rental rate for office space has been flat over the past four quarters up 1.5 percent for Class A space and down 0.8 percent for Class B. A few technology-powered submarkets have seen double-digit rent spikes. Industrial rents have sagged a bit but are expected to firm up as warehouse demand in particular outpaces supply. This situation is entirely normal in the early stages of a leasing market recovery; rental rates are the last indicator to turn the corner.

The dollar volume of property sales in 2012’s first quarter was 40 percent above the first quarter of 2011 according to Real Capital Analytics, on top of a 60 percent surge in sales last year compared with 2010.

While loan delinquency rates remain in nosebleed territory for CMBS (above 9 percent), CRE loans at banks have seen delinquency rates decline for six consecutive quarters, down to 6.12 percent in last year’s fourth quarter. In the first quarter of 1991 the epicenter of the last big real estate bust and the earliest data published by the Federal Reserve the delinquency rate for CRE bank loans stood at 12.06 percent.

Banks have been loosening standards for commercial real estate loans, and demand has been rising since the fourth quarter of 2010 according to the Fed’s Senior Loan Officer Opinion Survey of Bank Lending Practices.

So let’s give a cheer for commercial real estate as we wade through what will turn out to be, hopefully, a temporary soft patch.