Wall Street Woes Cast Shadow on Commercial Real Estate

The ongoing credit crunch and slow economic growth are starting to have a negative impact on the commercial real estate sector. Problems in the financial services sector also are affecting commercial real estate, according to the National Association of Realtors (NAR).

“Although capital remains available for residential loans, the credit crunch is pronounced in commercial lending,” Lawrence Yun, NAR’s chief economist notes in the trade association’s latest outlook report for the commercial real estate. “Combined with a slowing economy, the lack of credit is curtailing activity in the commercial real estate sectors. As a result, there’s been a slowdown in the net absorption of space, which is leading to higher vacancies and more modest rent growth.”

The NAR forecast analyzes quarterly data in the office, industrial, retail and multifamily markets, based on historic data provided by Torto Wheaton Research.

In the office sector, deterioration in the job market has slowed demand for office space. “Job cuts since the beginning of the year will bring more vacant office space to the market,” Yun says. “Office rent growth will slow greatly as a result.”

Office vacancy rates are expected to go up to 14.4% in the second quarter of 2009, from 12.9% in the second quarter of this year. Annual rent growth in the office sector is expected to hit 3.2% this year, contracting 0.4% in 2009. In comparison, in 2007, rent growth was up 8.0%.

NAR forecasts net absorption of office space in 57 markets it tracks will come in at 14.7 million sq. ft. this year and 10.9 million sq. ft. in 2009, compared with 57.3 million sq. ft. last year.

The group expects the industrial sector to fare better, however, largely on the strength of strong exports. While the economic slowdown has caused a decline in warehouse demand, a drop in the value of the dollar continues to favor American exporters.

Industrial vacancy rates are likely to hit 10.8% in the second quarter of 2009, up from 9.9% in the second quarter of this year. Annual rent growth is forecast at 1.1% this year and 1.0% in 2009, down from 3.6% for 2007. And net absorption of industrial space in 58 markets the association tracks, is projected to come in at a negative 16.7 million sq. ft. in 2008, rising to 35 million sq. ft. in 2009, compared with about 120 million sq. ft. for 2007.

The retail sector is feeling the impact of a slowdown in consumer spending, as consumers are squeezed by rising food and energy prices. Consequently, NAR expects vacancy rates on retail properties to rise to 10.4% by the second quarter of 2009, up from 9.7% in the second quarter of this year. Rents in the sector are projected to grow 1.2% in 2008, and then decline 0.9% in 2009, compared with a 3.2% increase last year. Net absorption of retail space in 53 retail markets NAR tracks is expected to shrink by 2.6 million sq. ft. this year, from more than 11 million sq. ft. absorbed last year.

One property type that is seeing positive fallout from ongoing economic problems is the multifamily sector bolstered by prospective homebuyers who are waiting on the sidelines and continuing to rent. This means rents will rise at a respectable pace of 3.9% in 2008, and 4% next year.

However, the NAR forecasts that vacancy rates in the multifamily sector will rise to 5.9% in the second quarter of 2009, from 5.4% in the second quarter of this year. Average rent will go up 3.9% in 2008 and 4.0% in 2009, compared with a 3.1% rise in 2007.

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