Commercial Real Estate Faces Challenges in 2010: NAR

Commercial real estate losses may be narrowing, but the market will face many challenges through next year as it continues to stare down its own credit crisis, according to research by the National Association of Realtors (NAR). The credit constraint will likely pressure the commercial mortgage market so that the Federal Reserve may be urged to grant a second extension to an important liquidity program, NAR said. The Commercial Leading Indicator for Brokerage Activity was 1.3% lower in Q209 than its Q109 level and 13.7% lower than its year-ago level. The index, which began in 1990, is currently at its lowest level since Q194. NAR said the quarterly decline was driven by decreases in industrial production, demand for office and retail space, fewer durable goods shipments and reduced consumer spending. But that decline is less than the 4.8% decrease seen between Q408 and Q109. The narrowed loss doesn’t mean commercial real estate is on the rebound yet, but could improve as early as next year, said NAR chief economist Lawrence Yun. “With the economic recession likely coming to an end within six months, a recovery in commercial real estate may soon follow,” Yun said in a statement. “The office sector requires job growth to fuel the demand for additional space, the industrial sector needs a rise in production and the retail sector is tied to consumer spending. Multifamily housing – the apartment market – often performs in reverse to trends in home sales, but can improve if there is sufficient household growth.” Another commercial real estate index also shows the market will continue to decline. The Society of Industrial and Office Realtors (SIOR) Commercial Real Estate Index, a survey of more than 650 market players, has declined for 10 consecutive quarters, and 96% of respondents reported deep rental discounts and increased tenant concessions in Q209. One of the biggest challenges facing commercial real estate firms is the lack of lending. “Properties with positive cash flow have had trouble finding financing to roll over debt, transactions are essentially at a standstill and new development is virtually nonexistent in most areas,” NAR Commercial Alliance Committee chair Robert Toothaker said in a statement. There may be some relief, however, with the Federal Reserve recently extending the Term Asset-Backed Securities Loan Facility (TALF) for commercial mortgage-backed securities (CMBS). “The flow of liquidity to commercial real estate will be critical for a sustainable economic recovery,” Toothaker said. “However, unless there is a tremendous short-term recovery in the [commercial real estate] markets, we expect the Fed will be revisiting the issue of another extension of the TALF program early in 2010.” Overall, commercial vacancy rates continue to rise while rents decline, and all sectors of commercial real estate face their own unique challenges as well, according to a third study, NAR’s Commercial Real Estate Outlook. Yun projects the unemployment rate to peak around 10.4% in Q409, before gradually improving during 2010, and the office sector continues to suffer from those job losses. The outlook predicts office commercial vacancy rates will increase from 15.5% in the Q209 to 18.8% in the Q210. Annual rent declined 0.4% in 2008 and is expected to fall 14.1% this year and an additional 10% in 2010. Yun also projects the gross domestic product to contract 2.9% in 2009, and will grow 1.5% next year. It’s expected to impact the industrial sector with a 13% increase in the vacancy rate in Q209, followed by a rate of 15% in Q210. Rents should fall 11.4% this year and another 11.7% in 2010, according to the outlook report. While more families are taking advantage of the first-time homebuyer tax credit, multifamily housing is seeing increased demand from families who have lost their homes to foreclosure. Apartment vacancy rates should decline from 7.4% in Q209 to 7.1% in Q210, the outlook report said. Write to Austin Kilgore.