Archive for the ‘Commercial Real Estate Thoughts’ Category
Commercial Real Estate Begins Recovery?
In 2008 and early 2009, market observers warned that the next crisis would be the commercial real estate sector and the commercial market has indeed been through a rough period but new data suggests that a recovery may be occurring in some sectors of the market.
Of course let’s not forget that we aren’t out of the woods yet when it comes to the commercial market. The current national vacancy rate stands at 17.5 percent and more than $1 trillion in commercial debt is coming due within the next 4 years as landlords struggle with weakened demand, lower rents, a stagnant economy and decreased property values. Not to mention the current delinquency rate for CMBS topped 9 percent.
The bad news gets worse as many companies already leasing space have empty desks and cubicles meaning that hiring new workers won’t require new space and new layouts / floorplans have reduced the amount of square feet allocated to each employee. Its the early 1990s all over again but this time vacancy rates are the result of weak demand instead of too much supply.
So after all of that, some markets are seeing a stabilization and in some cases improvement in commercial leasing.
New York has seen rents increase thus year by 0.2% while Washington DC has maintained a vacancy rate below 10 percent. Average effective rents (which include concessions like free or phased-in rent) nationwide fell $0.01 in Q3, the smallest decline for any quarter since 2008. The nationwide vacancy rate, while high at 17.5 percent, is now predicted to crest before the 18.7 percent which was reached in 1992.
But like I mentioned earlier, the previous commercial real estate crisis was a supply problem, this crisis is a demand problem. The commercial market is tied to the jobs market ie more jobs = more space required. Its a simple equation which is hard to fulfill as the economic recovery remains stagnant and open floor plans are reducing the amount of space required by tenants.
Are we about to see drastic improvements in the commercial market in Q4?
The answer is no.
Are we going to see the market get worse?
Certainly this will be true for metropolitan areas hit hard by the recession but less affected areas the office market is likely to improve.
Should businesses lease now before things start to improve?
Companies will continue to have a lot of leverage throughout 2011 but in areas like Manhattan and DC this would be a good time to start looking at leasing space in order to lock in the better deals.
