Survey Says Commercial Real Estate Headed for Turbulence

After years of multi-billion-dollar transactions and mega-developments, much of the commercial real estate sector is beginning to feel the burn as the economy loses speed, jobs disappear and the lending market continues to stifle borrowers, according to the First Quarter 2008 PricewaterhouseCoopers Korpacz Real Estate Investor Survey. However, the future may not be as grim as some would think.There are exceptions but overall, the national office, retail and hospitality markets are losing steam. Development in suburban office markets, particularly speculative projects, continues despite the fact that leasing activity has declined. The regional retail market is suffering as consumers bull back on spending, thereby leading to retailers’ vacating of space. And after rebounding from the sudden decline induced by 9/11, the hotel industry is not flourishing as it had been, as is evidenced by slowdowns in the overall ADR and RevPar. “Are we at the tip of the iceberg?”, Susan Smith, PwC Korpacz survey editor-in-chief and manager in PwC’s Real Estate Business Advisory Services Group, pondered when speaking to CPN today. “Yes. I think we’re going to see more job loss as a lot of banks and financial institutions are going to have layoffs in the next few months.”Yet each commercial real estate sector has its upside. In the office market, overall absorption in a significant number of central business districts is still positive, and rental rates are stable if not on the rise in some markets. The retail sector is growing stronger in areas with rapidly booming populations, such as Southern California’s major metropolitan areas, as well as San Francisco and Seattle. And lodging industry profits are expected to increase at a steady pace, going from $28 billion in 2007, to an anticipated $29.6 million this year, and $32.5 billion in 2009.While there is some bad news for the national office, retail and lodging markets, on the whole, the industrial and apartment sectors appear to be quite healthy. Prompted by continued growth in the high-tech industry and increasingly high office rents, the flex/R&D market is experiencing higher demand. Additionally, the warehouse market is doing well, as it is not significantly affected by decreases in consumer spending or job losses. And with the single-family housing market having taken a massive plunge, the apartment market is, conversely, on the rise, benefiting from the vast pool of previous homeowners now seeking rentals.Overall, while bumps in the road will continue for commercial real estate, a return to the good times may not be too far away. “The industry has learned from past mistakes,” Smith said. “So with the relative balance of supply and demand, we’re hopeful that commercial real estate will persevere and pull out of the recession relatively quickly.”