|
By Matthew Quinn
Commercial real estate fundamentals will decline more slowly than in 2009, with most property types reaching bottom near the end of the year and beginning a slow recovery starting in 2011, real estate services and investment firm Grubb & Ellis predicted in its annual industry forecast released Monday.
The report predicted the labor market will turn around only gradually and that sustained improvement is unlikely before the second half of this year.
"Because commercial real estate lags the labor market, it still has a ways to go before reaching its own low point," said Bob Bach, senior vice president and chief economist of Grubb & Ellis.
The investment market, which saw low transaction volumes in 2009 as banks, commercial mortgage-backed securities servicers and other lenders delayed working through distressed assets, will start to see some of these assets finally come to market in 2010, Grubb & Ellis said. The firm forecasts sales volume to increase 20 to 30 percent over 2009 levels. Prices, which are already down 40 percent from their peak in October 2007, may decline another 10 to 20 percent in order to meet buyers' expectations.
In a speech on Monday, Federal Reserve Governor Elizabeth A. Duke also predicted a cruel environment for commercial real estate this year.
"Hit hard by the loss of businesses and employment, a good deal of retail, office, and industrial space is standing vacant. In addition, many businesses have cut expenses by renegotiating existing leases," Duke told the Economic Forecast Forum in Raleigh, N.C. "The combination of reduced cash flows and higher rates of return required by investors leads to lower valuations, and many existing buildings are selling at a loss. As a result, credit conditions in this market are particularly strained."
She added: "In this environment, a turnaround in CRE is likely to lag the improvement in overall economic activity."
Despite the continuing drop in values and expected future losses, Bach does not believe commercial real estate is "the next shoe to drop" in the economy. He says the characterization implies the asset class "could wreak damage on the financial system equivalent to the subprime residential mortgage losses, which is highly unlikely because the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages."
That said, he admits that if banks aren't lending because they're coping with losses in their real estate portfolios, "this could impede the economic recovery."
In an article Monday, the Wall Street Journal said one major wild card for commercial real estate in 2010 was when big investors will get back into the market.
"For now, institutions that control more than $100 billion in unspent capital earmarked for real-estate deals have been waiting for prices to drop and more distress to come," the Journal said.
To that end, Grubb & Ellis expects banks to begin writing off their losses on distressed assets in 2010. The firm believes that could prompt investors to start deploying the capital they have waiting on the sidelines. Additionally, "highly leveraged buildings, many without the capital necessary to attract tenants, will transfer to new ownership, removing what was a major impediment to recovery in the investment market."
Capital alone won't produce tenants, at least not right away. Grubb & Ellis expects the national office market vacancy rate to reach 18.5 to 19 percent by the end of 2010, the highest on record since the firm began tracking the national market in 1986.
The outlook for the industrial market is better because it is less dependent on job growth than the office, retail and multi housing sectors. That means it could recover earlier, with vacancy rates beginning a gradual recovery in late 2010 and rental rates following in the second half of 2011. Vacancy in the industrial sector, however, is expected to reach 11.4 percent by the end of 2010, 70 basis points higher than year-end 2009.
Grubb & Ellis predicts the recent recession could have even longer-term implications for the retail market.
"Retailers and owners of retail real estate will need to adapt to a 'new normal' in consumer attitudes that may last for some time, including more conservatism and attention to value as households rebuild their savings," Bach noted.
 |
in CFO Conversations by 
Subscribe to this comment's feed
