Wall Street Ills Hit Commercial Real Estate

The major commercial real estate sectors are getting sick, thanks to tight credit and declining economic activity spawned by the meltdown of billions of dollars of Wall Street investments, according to the latest Commercial Real Estate Outlook, which is published by the National Association of Realtors research division for the Realtors Commercial Alliance. The report surveyed office, industrial, retail and multifamily activity in 50 to 60 markets, depending on the category. The credit crunch, which is pronounced in commercial lending, has combined with the slowing economy to slow net absorption of commercial real estate space in virtually all of the major sectors, according to NAR chief economist Lawrence Yun in a statement. As a result, vacancies are rising and rent growth remains modest. The declining job market has slowed demand for office space. NAR expects vacancy rates to increase to 14.4 percent by June of next year from the current 13 percent. The NAR report estimates that rent growth for 2008 will reach 3.2 percent, compared to 8 percent last year. Worse, rents will likely contract by nearly a half percentage point in 2009. Net absorption for the year is projected at 14.7 million square feet, with 10.9 million next year, down sharply from 57.3 million square feet of net absorption in 2007. While the decline in the value of the dollar will prop up exports and help the industrial market, NAR says that vacancy rates will still rise to 10.8 percent in the second quarter of 2009, up from 9.9 percent in the second quarter of this year. Rent growth of 1.1 percent this year will sag to just 1 percent next year, compared to 3.6 percent in 2007. Net absorption will likely go negative this year, down to minus 16.7 million square feet, and rebound to a positive 35.3 million next year. Returning to the 120.3 million-square-foot-level of 2007 will take time. Vacancy rates will hit 9.7 percent by the second quarter of 2009, up from 9.7 percent right now. Rents might grow 1.2 percent this year, but will decline in 2009, by an estimated 0.9 percent. Last year, retail rents rose 3.2 percent. While retail recorded net absorption of 11.1 million square feet last year, it will shrink by 2.6 million this year and rebound slightly next year to 2.8 million. Again, net absorption topped 11 million square feet last year. With first time homebuyers sidelined, multi-family is in the best shape of all the sectors. NAR estimates that vacancy rates will rise to 5.9 percent by the second quarter of 2009 from 5.4 percent now. Average rents will go up 3.9 percent this year and 4 percent next year, well above the 3.1 percent increase in 2007.