Business Specialties Investments
Nov 13, 2008
By: Eugene Gilligan, Senior Editor
Vacancy should increase in all property types, but investment sales could increase in the second half of 2009, even though many of those properties may be distressed assets. Those were some of the predictions offered at Grubb & Ellis’ 2009 Commercial Real Estate Forecast, held in Manhattan on Wednesday.
All property types are seeing rising vacancy rates, and they should continue to increase, said Robert Bach (pictured), senior vice president and senior economist for Grubb & Ellis Inc. Nationwide, office vacancy has increased from 13 percent in the third quarter of 2007 to 14.3 percent in this year’s third quarter. Industrial vacancy has risen from 7.6 percent last year to 8.5 percent; retail, from 7.3 percent to 8.4 percent; and apartment, from 5.6 percent to 6.1 percent.
Bach said vacancy rates will continue to increase, as the U.S. economy falters. “Job creation is a lagging indicator, and commercial real estate is a double lagging indicator,” Bach said. The U.S. economy will not likely see positive GDP growth until the second half of 2009, he predicted.
Some economic indicators are currently positive, Bach said, such as falling gas prices and relatively low interest rates. Also, the government is likely to unveil another fiscal stimulus package soon, in the $100 billion to $150 billion range. This booster shot may have greater effect than the last $160 billion package, which hit consumers pocketbooks simultaneously with skyrocketing oil prices.
Investment sales in this year’s third quarter are down about 60 percent from last year, hampered by constrained debt markets and eroding market fundamentals, said Glen Esnard, Grubb & Ellis’ president of capital markets. Also, sales volume has fallen due to the lack of confidence in the ratings agencies, Esnard said. Investors have a lack of faith in ratings of corporations, important in knowing the financial strength of tenants, so they are hesitant to make buying decisions.
But investment volume could grow by as much as 15 percent from 2008 levels, Esnard said, picking up significantly toward the end of next year. Many sales are likely to be of distressed properties. With $36 billion of CMBS due for refinancing in 2009, owners will find it very difficult to obtain comparable financing, and will be asked to contribute more equity into the deal just as cash flow may be diminishing due to lower rents and higher vacancy. “Lenders will have to take action,” according to Esnard, and a likely course would be to sell the asset. Increased transaction volume will have a benefit. “That will help us know where pricing is,” Esnard said.
Of course, one unknown is how commercial real estate will fare under the coming presidency of Barack Obama. Bach said capital gains tax rates will likely rise, and some building owners may look to sell their properties before the end of this year, before those increases take effect. Beyond that, though, the new administration is likely to be willing to take bold steps, and be unafraid to enact a major economic stimulus program, while putting concerns about the ballooning budget on the back burner. “That’s not a bad thing,” Bach said. “They’re likely to hit it with both barrels."
By: Eugene Gilligan, Senior Editor
Vacancy should increase in all property types, but investment sales could increase in the second half of 2009, even though many of those properties may be distressed assets. Those were some of the predictions offered at Grubb & Ellis’ 2009 Commercial Real Estate Forecast, held in Manhattan on Wednesday. All property types are seeing rising vacancy rates, and they should continue to increase, said Robert Bach (pictured), senior vice president and senior economist for Grubb & Ellis Inc. Nationwide, office vacancy has increased from 13 percent in the third quarter of 2007 to 14.3 percent in this year’s third quarter. Industrial vacancy has risen from 7.6 percent last year to 8.5 percent; retail, from 7.3 percent to 8.4 percent; and apartment, from 5.6 percent to 6.1 percent.
Bach said vacancy rates will continue to increase, as the U.S. economy falters. “Job creation is a lagging indicator, and commercial real estate is a double lagging indicator,” Bach said. The U.S. economy will not likely see positive GDP growth until the second half of 2009, he predicted.
Some economic indicators are currently positive, Bach said, such as falling gas prices and relatively low interest rates. Also, the government is likely to unveil another fiscal stimulus package soon, in the $100 billion to $150 billion range. This booster shot may have greater effect than the last $160 billion package, which hit consumers pocketbooks simultaneously with skyrocketing oil prices.
Investment sales in this year’s third quarter are down about 60 percent from last year, hampered by constrained debt markets and eroding market fundamentals, said Glen Esnard, Grubb & Ellis’ president of capital markets. Also, sales volume has fallen due to the lack of confidence in the ratings agencies, Esnard said. Investors have a lack of faith in ratings of corporations, important in knowing the financial strength of tenants, so they are hesitant to make buying decisions.
But investment volume could grow by as much as 15 percent from 2008 levels, Esnard said, picking up significantly toward the end of next year. Many sales are likely to be of distressed properties. With $36 billion of CMBS due for refinancing in 2009, owners will find it very difficult to obtain comparable financing, and will be asked to contribute more equity into the deal just as cash flow may be diminishing due to lower rents and higher vacancy. “Lenders will have to take action,” according to Esnard, and a likely course would be to sell the asset. Increased transaction volume will have a benefit. “That will help us know where pricing is,” Esnard said.
Of course, one unknown is how commercial real estate will fare under the coming presidency of Barack Obama. Bach said capital gains tax rates will likely rise, and some building owners may look to sell their properties before the end of this year, before those increases take effect. Beyond that, though, the new administration is likely to be willing to take bold steps, and be unafraid to enact a major economic stimulus program, while putting concerns about the ballooning budget on the back burner. “That’s not a bad thing,” Bach said. “They’re likely to hit it with both barrels."
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