Commercial R.E. Joining Residential
In the Penalty Box … by Mike Larson
Thanks MWM for the info...
The residential real estate business started slowing in 2006, and then really fell out of bed in 2007. But commercial real estate continued chugging along for a while. That’s all changing — and 2009 will likely be even worse for landlords and investors in warehouse, office, or retail property and related securities.
Just consider …
* Construction activity is starting to tank as commercial mortgage credit dries up and the economy slumps. An American Institute of Architects (AIA) index, which serves as a great leading indicator for commercial construction since you need to design a building before you build it, just plunged to a record low of 34.7.
* With credit tighter, commercial real estate sales and prices are now following home prices lower. The final numbers haven’t been added up yet. But it appears that commercial sales plunged by about 70% between 2007 and 2008.
* Meanwhile, the Moody’s/REAL Commercial Property Price Index dropped 2.4% in October, the tenth month out of the last 14 where it declined. Prices are now down more than 11% from their late 2007 peak.
* Finally, sublease space is flooding the office market as companies fire workers. And mall vacancies are surging as retailers like Circuit City and Linens ‘N Things go broke. Even the perennially optimistic National Association of Realtors just forecast that office vacancy rates will rise to 16.4% by late 2009, from 12.5% in 2007, while retail rents will drop by 7.3%.
If you own commercial property, you’re probably already feeling the heat from the slumping economy. Expect further increases in vacancy rates in 2009, and additional pressure on rents when leases come up for negotiation. Lenders are also a lot stingier with credit that they’ve been in the past, meaning it should be tougher to refinance your loans.
Of course, commercial real estate representatives aren’t just sitting idly by. They’re doing what all their other … er … capitalist brethren are doing. They’re going to Washington begging for spare change!
As The Wall Street Journal recently recounted in a story called “Developers ask U.S. for Bailout as Massive Debt Looms”:
“With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.
“They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.”
Do I think THAT will make a difference? It might loosen credit a bit, sure. But the lesson from the residential industry is that all these bailouts merely ease the symptoms of this crisis somewhat, without curing the underlying disease.
In other words, I expect commercial real estate fundamentals to weaken in 2009, loan defaults and foreclosures to climb, and prices to fall no matter what Bernanke & Co. do in Washington.
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