The Expert: Here Comes the Pain

Conditions in the U.S. office market have turned very dour very quickly. We are thus far only getting a taste of what we know is coming. Vacancy rates are generally on the rise, but the latter half of the third quarter was far worse than the first half, meaning that much of the third-quarter data that has been released recently does not fully reflect the closing weeks of the quarter. We see the layoff announcements. We’ve watched major credit tenants essentially disappear from the map. Heck, we personally know the people who are no longer occupying those offices.We also know that prices are falling, but even this has been oddly slow to show up in the data. The credit crunch has slowed transactions to a crawl. Thus, we’re not getting a full picture of the pain, as the end of the third quarter was far worse than the beginning. If one wants to get a flavor or the direction of commercial property prices, consider the public markets, which have the benefit of liquidity: The Vanguard REIT ETF is down by more than 40 percent from a year ago as I write this.These last several weeks are something altogether new. They have their roots in our long-running credit problems, but this is not the orderly unwinding of the housing boom or the downgrading of obscure asset classes. I haven’t quite decided whether it was Lehman Brothers Inc. going bust or the rushed cobbling together of the U.S. bailout plan that triggered it, but something changed very quickly for the worse. It has been about six weeks since I have seen an economic indicator that hasn’t shouted recession.Expect office fundamentals to more fully join the chorus in the weeks, months and quarters ahead.