RISMEDIA, May 27, 2009-The general economic downturn, complicated by a severe credit crunch in commercial real estate, is dampening commercial real estate activity. In addition, a forward-looking index shows the forecast for commercial real estate sectors will remain weak for the remainder of the year, according to the National Association of Realtors (NAR). Lawrence Yun, NAR chief economist, said commercial real estate has been hit by a double whammy. “Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity,” he said. “It is critical for the Federal Reserve to increase liquidity by purchasing commercial mortgage-backed securities. Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound.”
The Commercial Leading Indicator for Brokerage Activity fell 4.8% to an index of 103.5 in the first quarter from a downwardly revised reading of 108.7 in the fourth quarter, and is 12.9% below the 118.8 recorded in the first quarter of 2008. NAR’s track of the commercial leading indicator dates back to 1990.
The weakening index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, can be expected to decline over the next six to nine months.
The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 600 local market experts, also indicates a lower level of business activity in upcoming quarters. More than 90% of respondents believe it is a tenant’s market, with many tenants benefiting from moderate to deep discounts in office and industrial rental rates, as well as landlord concessions.
The SIOR index has declined for nine straight quarters and stood at 42.3 in the first quarter, well below the 100 point criteria that represents a balanced marketplace.
Realtors Commercial Alliance Committee chair Robert Toothaker said data for commercial mortgage-backed securities are very telling. “We went from $230 billion in CMBS issued in 2007 to only $12 billion in 2008,” he said. “Thus far in 2009 the number is essentially zero- liquidity in commercial credit is crucial to prevent damage to the broader economy. We need better policies and progress in accounting rules to facilitate lending.”
Overall, commercial vacancy rates are rising and rents are softening, according to NAR’s latest Commercial Real Estate Outlook. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by Torto Wheaton Research.
The gross domestic product is expected to contract 2.9% this year, then grow 1.4% in 2010. Similarly, the consumer price index is forecast to decline 0.8% in 2009 before rising 1.7% next year.
The unemployment rate is projected to average 9.5% this year and 10.2% in 2010. Inflation-adjusted disposable income is likely to grow 1.3% in 2009 and 1.1%.
“Although we expect the economy to begin to stabilize later this year, unemployment will probably peak at about 10.5 percent around the end of 2009,” Yun said. “The job picture should gradually improve as 2010 progresses, but the fundamentals in commercial real estate won’t stabilize until somewhat later and will depend on the Fed’s actions.”
The apartment rental market-multifamily housing-has been doing better than other commercial sectors, but a gain in home sales during the second half of this year will modify demand. Multifamily vacancy rates are forecast to rise to 6.8% in 2009 and 6.7% next year from 5.7% in 2008.
Average rent should grow 1.5% this year and 2.5% in 2010, following a 2.9% gain in 2008. Multifamily net absorption is projected at 133,000 units in 59 tracked metro areas in 2009 and 89,700 next year.
For more information, visit www.realtor.org.