How are these factors impacting thecommercial real estate outlook? In brief, thenext quarters will likely be a difficult marchtoward stabilization, punctuated by modestsigns of improvement. The experience is notlikely to be spread evenly across propertytypes or geographical markets. Whereasoffice properties struggle with high vacancies,declines in rents for industrial space areexpected to grow. And while demand forapartments is projected to rise in 2010,challenges continue to mount for distressedhotel and retail properties.For the fourth quarter 2009, netabsorption is expected to decline 18.7 millionsquare feet for office space and 74.9 millionsquare feet for industrial properties. Retailspace is likely to post 4.4 million square feetof negative net absorption. Even apartmentsare expected to witness a quarterly decline of44.7 thousand units in net absorption. Intandem with the decline in demand, availablespace is growing across all property types.Vacancy rates for the fourth quarter areexpected to hit 17.0% for office properties,14.2% for the industrial sector, 12.6% forretail and 7.8% for multi-family. In order toattract or retain tenants, landlords arereducing rents. By the end of 2009, rent ratesare expected to be down 12.1% for officeproperties, 10.8% for industrial, 1.3% for retailand 4.1% for apartments.On the transaction side, salesactivity has been positive, but slow and stuckin a vicious cycle where lack of credit ismaintaining a negative spiral. Based on thelatest Quarterly Banking Profile from theFederal Deposit Insurance Corporation(FDIC), the banking industry continues to befully engaged in the deleveraging process.During the third quarter of 2009, loanbalances at commercial banks declined 2.8%from the previous quarter, the largestpercentage drop in 25 years. Lendingcontracted mostly sharply for construction anddevelopment loans, which were down 8.1%from the second quarter, to $492 billion. At avolume of $1.27 trillion, commercial andindustrial loans posted the next largestdecline
—
6.5%.Banks increased their holdings ofconservative assets
—Federal Reserve banks‘
balances gained 36.7%, to $531 billion, andTreasuries advanced 49%, to $86.6 billion.
These moves have strengthened banks‘
capital levels and vaulted them intoprofitability. Equity capital increased 2.9%, to$1.46 trillion and the FDIC stated thatregulatory capital ratios have hit the highestlevels in 19 years. For the third quarter,banks posted earnings of $2.8 billion, a
dramatic change from the second quarter‘s
$4.3 billion loss.Nonetheless, in an encouraging signfor commercial real estate, the commercialmortgage backed securities (CMBS) marketregained a pulse around midyear, sparked in
part by the government‘s TALF program, with
over $1.2 billion issued during the thirdquarter. The Federal Reserve also extendedfunding for the TALF program into 2010 forboth new and legacy CMBS issues. Inaddition, the Fed also issued a policystatement in support of commercial realestate loan modifications, given declines incash flow, asset prices and low transactionvolume.Additionally, recoveries in globaleconomies and rising international cashreserves are prompting investors to startlooking for deals. Transaction activity duringthe third quarter of 2009 rose 27.4%, with 677major properties exchanging hands for a totalof $13.1 billion. The advance in commercialproperty sales was driven by an 85% jump inoffice sales. The volume of retail and hotelsales also increased noticeably, by 46% and40%, respectively. Apartment transactionswere up 12%, while industrial sales declined32%.Deriving from these factors, itbecomes apparent that commercial realestate is facing a quick-changing landscapewhere maturing debt, loan modifications,lower prices and private investment currentlyvie for a foothold. Central to any marketstabilization and sustained recovery is theissue of employment and credit availability.More to the point, a positive shift inemployment and financing activity are bothneeded to place commercial real estate onsolid ground.THIRD QUARTER SIORMARKET INDEX CONTRACTS
November 2009
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More than716 SIOR market expertsacross the country weighed inon local Industrial and Officemarket conditions for the ThirdQuarter 2009 SIOR CommercialReal Estate Index, compiled bythe SOCIETY OF INDUSTRIALAND OFFICE REALTORS(SIOR) in association with theNATIONAL ASSOCIATION OFREALTORS (NAR).SIOR members report that thenational economic recession iscontinuing to have a significantnegative effect on localindustrial and office markets.However, there are encouragingsigns in terms of expectationsas SIOR members are morebullish about the 3-monthoutlook than for many quarterswith 47% expecting the marketto improve in the next threemonths.Investment activity continues tobe down across the board even
though it is a buyer‘s market
and prices continue to drop.
SIOR MARKETINDEX
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