CRE Market Is in for 'Tough Sledding': Record-High Vacancies in All Segments of the Commercial Real Estate Market Are Forecast through 2010

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The commercial real estate market is driven largely by employment, and with job losses topping 600,000 every month, CRE is facing tough times through 2010. Hans Nordby, who analyzes U.S. property markets and trends for Property and Portfolio Research, described the struggling CRE market in a recent RMA audioconference.

"All four property types--apartment, retail, office, and warehouse--are going to have record high vacancies," he said. "It's going to take jobs to bail us out of this."

Job growth typically trails a rise in gross domestic product by about nine months, Nordby said. "Assuming that GDP growth turns positive in the third quarter of this year, we should get some job growth in most markets by the middle of next year."

The demand for CRE won't start to pick up until the beginning of 2011, he added, but only if GDP moves in a positive direction in this year's third quarter (Figure 1).

Retail Market

The retail market has been the hardest-hit CRE sector, Nordby said.

"Retail is a train wreck. Vacancy rates are spiking from about 10% at the beginning of 2008 to about [a projected] 20% in 2010. This is the worst spike in vacancies we've ever seen in any property type."

Driving the vacancies is a drop in retail sales, primarily in department and specialty stores (Figure 2). Because such stores often are located in malls, Nordby expects mall vacancy rates to skyrocket.

"Discount stores, wholesale stores, grocery stores, everything else isn't so bad. Everyone is looking for discounts, so they're not going to malls anymore," he said.

"The next couple of years will be painful for retail. But the good news is that there is no new supply of retail space. So when retail growth returns, vacancy rates will get back to normal."

Office and Warehouse Markets

Rising unemployment is an obvious cause for the slump in the office and warehouse markets, Nordby said.

"Office vacancies will be at an all-time high of 21% by the beginning of 2011, up from about 14.5% at the end of 2007. That will be painful," he noted.

Meanwhile, the supply of office space has risen since 2007 as the demand has gone down, further increasing the vacancy rate.

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"Supply was too much in relation to demographics and demand, but the good news is that, with a snapback in the economy in the next few years, demand will exceed supply and vacancy rates will come down beginning in 2011," Nordby explained.

For the warehouse market, net absorption is closely correlated to GDP growth and contraction. …