As the real estate industry has weathered an epic crash in the residential markets, we are now looking at perhaps an even worse one in the commercial markets. With the repercussions potentially worse for commercial investors.
First the bad news today.
Nationwide, effective office rents fell 8.5% in the third quarter compared with the same period a year ago, the steepest year-over-year decline since 1995, according to Reis Inc., a New York real-estate research firm.
The decline came as companies returned a net 19.6 million square feet of space to landlords in the third quarter, slightly more than in the second quarter. For the first three quarters of this year, the net decline in occupied space totaled a record 64.2 million square feet, the highest so-called negative absorption recorded since Reis began tracking the data in 1980. (That doesn’t count space that left the market as a result of the 2001 terrorist attacks.)
The vacancy rate, meanwhile, hit 16.5%, a five-year high, according to Reis. via WSJ.com.
Vacancy rates this high are scary enough, but we have to add one other part to the equation. When residential real estate stalled and then slowed investment money poured into the commercial sector. All of the residential construction guys were still employed building offices and strip malls. Remember that?
Add to that prices were sky high and lenders still zealously doing deals with other peoples money. It is not that we have a capacity problem, we have a capacity and a debt problem at the same time.
The buildings were built to be fully occupied and then were still borderline profitable. Remember how the money would be made on the exit?
Now these investors are upside down, have balloon payments coming due, facing nearly 10% unemployment, and a recession all at the same time. The only thing saving many of these deals is the banks are afraid of calling the loans because it will put them out of business.
The only winners are the entrepreneurs who are looking for cheap rent.
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{ 5 comments… read them below or add one }
Although this data is probably a good reflection of the country, I believe some areas (especially pockets here in FL) commercial RE is actually better now than last year.
Sure rates have fallen, but most of our larger vacancies are being filled by retailers that are still expanding – Kohl’s and Publix to name a few.
The current real estate market is a golden opportunity for hungry entrepreneurs. These visionaries can obtain fantastic rental rates. The money they save on the rent, will allow them to grow their business and help energize the economy.
Our Firm specializes in Real Estate E&O insurance for commercial real estate firms. We have seen signficant signs of a commercial real estate potential crash via a signficant increase in reported commercial real estate E&O claims. The types of claims we are seeing relate to misrepresentation of the viability of other tennants and a center as a whole. As a center loses tenants, other tenants and landlords suffer. Many of these suits bring in the commercial real estate agent.
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http://www.axisins.com
201-847-9175
The banks are going to try to be lenient, it would only hurt business and the whole country if they forced businesses to move or shut their doors. After what happened with the housing crisis, I doubt they will want to create another crisis before the wounds of the other one have even started to heal.
-Tyler
There are two winners. Expanding retailers and entrepreneurs can definitely benefit by taking advantage of lower occupancy costs. Savvy investors can also benefit by scooping up properties at bargain basement prices well below replacement cost.