With Commercial Real Estate's Bleak Outlook, Tread Lightly

By Greg Sukenik

The National Association of Realtors issued predictions for four major sectors of commercial real estate this week. According the report, national office vacancies are expected to increase from 16.1% in 2009 to over 20% in 2010 with rents falling about 7% this year and 0.8% next year.

Retail vacancies, which were just under 10% in 2008, are projected to rise to 12.1% in 2009 and 15.8% in 2010. Rents are expected to fall 2.1% in 2009 and 1.5% in 2010. Industrial vacancies are expected to increase to 11.9% in 2009 and 12.6% in 2010 with rents falling 3.4% this year and 4% in 2010. Multi Family is expected to fare the best; vacancy is expect to increased to 6.8% this year and 6.7% in 2010 from 5.7% in 2008 with rents slightly growing this year and next.

If these predictions are accurate or close to accurate, there will be more pain in commercial real estate, and we are nowhere near a bottom -- especially in office and retail. Loan delinquencies have been increasing in both segments in early 2009 and they could spike over the next two years.

Going forward, overweight multi-family, which continues to benefit from lower home ownership rates and less new supply. Invest in retail and office selectively; only companies that have a handle on their debt maturities over the next couple of years which will help them withstand a prolonged downturn. In retail, we still recommend Regency Centers (REG), and in office Vornado (VNO).

Comments

[PastTense:]

With vacancies this high I would expect much more competition from commercial real estate owners--and thus much greater rent reductions than predicted here.

May 22 05:02 PM

[On Going Co...:]

Good recommendation on VNO.

I think you have to consider rent concessions as well. Office owners have to compete by giving free rent periods, and decreased CAM expenses passed onto tenants on top of the base rent reduction. So the owners are not only generating less rental revenue but have increased expenses.

Also with multifamily properties, you are not considering the shadow markets (ie rental of homes, doubling up, for sale products converted to for lease). Just because of lower ownership rates does not mean multifamily products will fare better. Multifamily just has been slower to show the hemmoraging that retail and office have. Vacancies are up, rents are down, and rental concessions are up. The oversupply of for sale products like houses and condos are being rented if they cant be sold. People are doubling up and sharing in rental cost in this down economy. So there is an oversupply of not only new construction but existing multifamily. Loan delinquencies are also growing for multifamily especially C class complexes.

May 22 05:43 PM

[jdl51:]

I keep hearing about the commercial real estate crash but SRS keeps falling and is near its low. Someone is driving the commercial REITS up.

May 23 10:25 AM

[fatcat:]

The expectation that the reits will be bailed out is buoying the market...


On May 23 10:25 AM jdl51 wrote:

> I keep hearing about the commercial real estate crash but SRS keeps
> falling and is near its low. Someone is driving the commercial REITS
> up.

May 23 01:03 PM

[-osgo-:]

Is there any other info? What's so screwed about the environment is that in a normal time, SRS would be sky high. Basic assumptions about economic activity have been thrown out the window because of the bail-outs. What should be a screaming buy has become a wealth-destroyer...Eve... You Know Is Wrong and it's not the Fed but the Ministry of Love.

What other reasons are holding it down [SRS]? Elucidation please?

-osgo


On May 23 10:25 AM jdl51 wrote:

> I keep hearing about the commercial real estate crash but SRS keeps
> falling and is near its low. Someone is driving the commercial REITS
> up.

May 23 03:10 PM

[Distressed ...:]

The shoe has dropped people. From Trepp CRE mortgages are at a 11% delinquency rate, Even from Fed data we could be headed higher. The CMBS backstop might help out somewhat.

Fed Adds Older CMBS to TALF, The Shoe Dropped! (Trepp)
www.distressedvolatili...

-Dvol

May 23 03:59 PM

[REITBull:]

Look at the underlying index, IYR. It has been rebalanced with some of the better capitalized REITs. Many of the top holdings have had successful equity offerings in the past few months, allowing them to pay off up coming maturties and improve their balance sheets. SRS was bled dry several months ago.


On May 23 03:10 PM -osgo- wrote:

> Is there any other info? What's so screwed about the environment
> is that in a normal time, SRS would be sky high. Basic assumptions
> about economic activity have been thrown out the window because of
> the bail-outs. What should be a screaming buy has become a wealth-destroyer...Eve...
> You Know Is Wrong and it's not the Fed but the Ministry of Love.
>
>
> What other reasons are holding it down [SRS]? Elucidation please?
>
>
> -osgo

May 23 07:17 PM