Commercial Real Estate Crisis Reaches Global Scale

A new report from the Royal Institute of Chartered Surveyors (RICS), a global network of property surveyor professionals, paints a dismal picture for commercial real estate owners across the globe. Tenant demand for new space across office, retail and industrial sectors appears to be falling everywhere in the world, with survey participants reporting rent declines in more than 90% of the countries monitored by RICS.

With further deterioration in property fundamentals expected to take place in the first quarter of 2009, investor interest in commercial real estate acquisitions continues to wane. Cap rates are on the rise, the number of investment sales deals is falling, and capital values are declining at the fastest pace since the beginning of the credit crunch.

RICS’ “Global Commercial Property Survey” for the fourth quarter of 2008 showed the mood is particularly negative among surveyors in Asia. While Asian economies avoided the worst of the credit crisis, they are now suffering from the fall in demand for new exports, according to Simon Rubinsohn, the London-based chief economist with RICS.

“It’s a region that’s very heavily dependent on exports and what we’ve seen in the months post Lehman bankruptcy is a complete breakdown in the trading system,” Rubinsohn says. “The countries that were under pressure from [lack of lending] transferred the pressure to countries they were buying from and it’s feeding very quickly into the commercial real estate arena.”

Approximately 91% of surveyors in emerging Asian countries, including Afghanistan, China, India, Indonesia, Malaysia, Thailand and Vietnam, reported falling demand for new office space in the fourth quarter of 2008. Another 35% reported a decline in demand for retail space and 37% reported a decline in demand for industrial space.

In developed Asian economies, which include Hong Kong, Japan, Singapore, South Korea and Taiwan, an average of 78% of surveyors reported a decline in demand for new office space and 52% reported a decline in demand for retail space. About 54% reported a decline in demand for industrial space.

Rents in the fourth quarter of 2008 fell everywhere except Latin America. In both emerging and developed Asia, 80% of surveyors reported rent declines in the office sector. In North America, 71% of surveyors reported office rent declines, followed by 53% of surveyors in emerging Europe. Emerging European countries include Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Serbia, Montenegro, Slovakia, Turkey and Ukraine.

For the retail sector, 82% of surveyors in North America reported rent declines, 61% of surveyors in developed Asia and 51% of surveyors in emerging Europe reported rent declines. Approximately 62% of surveyors in North America reported rent declines in the industrial sector, with 60% reporting industrial rent declines in emerging Asia and 47% in developed Asia.

By contrast, 16% of surveyors in Latin America still reported office rent increases in the fourth quarter of last year. Another 7% reported retail rent increases and 8% reported industrial rent increases.

Latin America may be somewhat protected from the current recession by its reliance on the commodities market, which hasn’t been hit as hard as some other sectors of the global economy, and by its low level of exposure to the lending crisis, according to Rubinsohn. “Rents are falling in Latin America,” he notes. “We are just not seeing the same pressure there as we are seeing elsewhere.”

The U.S. commercial market, on the other hand, continues to show dismal results. “Both United States and United Kingdom were poorly viewed in our last survey and they are still viewed that way,” he says.

Looking at the first three months of this year, 84% of surveyors in North America expect to see office rents fall further, with 87% expecting declines in retail rents and 62% expecting declines in industrial rents. In fact, surveyors across the globe expect to see declining rents in the first quarter of 2009.

With such a dismal outlook for property fundamentals, investor interest in commercial real estate has been falling rapidly. About 95% of surveyors in North America reported a decline in investment sales transactions in the office sector for the fourth quarter of 2008. Another 92% saw declines in retail investment sales and 89% of surveyors reported a decline in industrial sales volume.

In developed Asian countries, 87% of surveyors reported a fall in office investment sales, 78% reported falling retail sales and 86% falling industrial sales. The region that appears to be least affected is Africa and the Middle East, with only 49% of local surveyors reporting a decline in office sales, 36% reporting a decline in retail sales and 47% reporting a decline in industrial sales.

With the global credit crisis putting further downward pressure on property prices, capital values continued to deteriorate in the last three months of 2008. In developed Asian countries, 100% of surveyors reported a decline in office property values in the fourth quarter. Another 100% reported falling industrial values in Australia and New Zealand. In North America, 87% of surveyors reported falling office and retail property values and 82% reported falling industrial values.

The hope for U.S. property owners remains that having been the first to enter the current downturn, it might be among the first to come out of it, provided government intervention does more good than harm, according to Rubinsohn.

“I think the Anglo-Saxons [including U.S. and U.K.] are more likely to come out of this before other countries, although there are issues as to whether the financing regime can be resurrected,” he says. “But for most of this year it’s likely to be fairly challenging.”

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