Credit Availability Key to Commercial Market Recovery in 2010

The recent deep economic downturn has had a pronounced impact on commercial real estate sectors, but credit availability is the big unknown that will determine how soon commercial markets recover, according to the National Association of Realtors (NAR).

Lawrence Yun, NAR chief economic said he was encouraged during the week of November 23 by some initial movement in commercial mortgage-backed securities. “The first commercial mortgage bond deal in over a year shows the Federal Reserve’s efforts to sell securities through the TALF program can be fruitful, but the level of activity is well below what is required to resuscitate the commercial market. Credit availability needs to significantly rebound for any hope of a meaningful commercial recovery in 2010.”

Yun said the modest index recovery follows steep declines in the past several quarters. “Gains in industrial production, durable goods shipments and retail sales; a rebound in the NAREIT price index; and improving figures on first-time unemployment claims were stabilizing factors.”

The Society of Industrial and Office Realtors (SIOR), in its SIOR Commercial Real Estate Index, suggests a lower level of business activity in upcoming quarters with recessionary impacts on the industrial and office markets, although 47 percent of members are most hopeful about the near-term outlook. The SIOR Index has declined for 11 consecutive quarters and stood at 35.3 in the third quarter, compared with a level of 100 that represents a balanced marketplace.

A Look and Office and Retail Vacancies
Looking at the overall market, commercial vacancy rates are rising and rents are declining, according to NAR’s latest Commercial Real Estate Outlook.

Vacancy rates in the office sector are expected to rise from 16.1 percent in the third quarter to 18.5 percent in the third quarter of 2010, with job losses continuing to dampen the market. Annual office rent should fall by 12.1 percent this year and decline another 8.5 percent in 2010. In the 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen at a negative 56.1 million square feet in 2009 and a negative 43.3 million next year.

Retail vacancy rates will probably rise from 12.2 percent in the third quarter to 13.0 percent in the third quarter of 2010. “Near term, retail is the most hopeful commercial sector with an expected rise in consumer confidence, resulting from a restoration of housing wealth as home prices stabilize and begin to rise around the spring of next year,” said Yun. Average retail rent should decline 1.3 percent in 2009 and 3.0 percent next year. Net absorption of retail space in 53 tracked markets is forecast at a negative 21.9 million square feet this year and a negative 4.7 million in 2010.

Industrial vacancy rates are forecasted to rise from 13.5 percent in the third quarter of this year to 15.4 percent in the third quarter of 2010, and rent is also projected to fall another percentage point. With much of the construction in recent years customized for specific industrial needs, there is an overhang of obsolete structures on the market, which presents “an opportunity for non-current owners to look at distressed industrial properties in the current market,” Yun added.