Commercial Real Estate next to sink

NAR Chief Economist Lawrence Yun sounded a downbeat note on the state of the commercial real estate market over the next few years in an address Friday afternoon at the 2009 REALTORS® Conference & Expo.

Yun said the most immediate problem for this sector is simple: There aren’t nearly enough buyers.

"Who is buying? The answer is no one,” he explained. “The level of transactions is way down. We're looking at an almost 90 percent decline from peak to current levels."

One particularly hard-hit area of commercial is the office sector: Vacancy rates are getting precariously close to 20 percent and sales volume has fallen as far as 93 percent from its peak just a few years ago.

The industrial part of commercial is also performing well below the norm, due in large part to warehouses, Yun said. There's more space, but much less need for it. Rents fell more than 10 percent this year, and probably will again next year.

The prospects for retail and multifamily are somewhat better. Yun predicts that as housing prices rise, people will be more inclined to spend, which will benefit retail. In addition, young people and professionals who’ve fallen on hard times will be able to move out of their relatives’ households and into their own residences as the economy slowly recovers. This will boost both multifamily and housing, Yun said, but he added that the employment picture will have to improve first.

However, the overall commercial market will probably continue to move down—too many indicators point to more trouble. For instance, cap rates are starting to rise for the first time since the beginning of this decade. Issuance of commercial mortgage-backed securities (CMBS) actually fell to zero during a few recent months. Moreover, CMBS delinquency rates have skyrocketed over the past couple of years.

That isn’t even the worst part, though. The biggest concern in the coming years is defaults. Commercial real estate debt maturities will spike at $1.8 trillion in 2012, and much of that amount is comprised of poor-quality loans.

"The credit situation in the commercial market is very disconcerting,” Yun said. “On the residential side, there is more government backing. That's not the case for commercial real estate. In commercial, there will be another letdown before things improve."

However, he also expressed confidence that the federal government would try to prevent a large collapse in the commercial sector. The Federal Reserve and Treasury Department have extended the Term Asset-Backed Securities Loan Facility (TALF), a federal relief program intended to increase credit availability, through 2010.

Yun said he expected to see more relief efforts in the future.

"The policy makers clearly understand that commercial real estate is the next shoe to drop, so they're looking at things they can do. That doesn't mean they have the policy to implement yet," he said.

Source: Brian Summerfield, REALTOR® magazine