Torto Wheaton has a new essay summing up its reaction to flutters in the debt market entitled Will I Be Paid Back? (reg. req.)
In short, the firm doesn't expect contagion in the commercial real estate arena to be that widespread.
We are strong believers that "fundamentals matter most" and we do not see a contagion into the commercial real estate market. We do see a slowdown in commercial space demand and are expecting to see higher vacancy rates in some property types at year end compared to today. But to us this is not a contagion from the capital market, but rather a response to a slowing economy – largely from the effects of overbuilding and subprime credit in the residential market.
Of all areas, it says that retail is seeing the great effects thus far.
Retail space is showing the effects of the downturn in the single family market. Vacancy levels are up with the current rate being 80 basis points above a year ago. Net absorption for the year is positive, but the second quarter was a negative 500,000. We expect vacancy to be higher by year end and we do expect this property type to be the most affected by the economy at this time.
Lastly, the essay concludes that there is less interest in Class B and C properties, but the market is showing "favor for the selection of the low leverage buyer over the highly leveraged structured player."
That conclusion is similar to what we found in our July cover story titled Quality Counts.