 |
|
| Search RENTV |
 |
|
|
|
| Video Programs |
|
| News |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| R. E. Marketplace |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Executive Subscribers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/11/10
|
In 2010, commercial real estate fundamentals are expected to decline more slowly than in 2009, with most property types reaching bottom near the end of the year and beginning a slow recovery starting in 2011. At least that’s the opinion from Grubb & Ellis Company, the national real estate services firm that just released its 2010 Real Estate Forecast.
“The national economy has begun a slow and cautious recovery, but the labor market, which often lags the broader economy, will turn around only gradually with sustained improvement unlikely before the second half of 2010. Because commercial real estate lags the labor market, it still has a ways to go before reaching its own low point,” said Bob Bach, Senior Vice President, Chief Economist at Grubb & Ellis. “The good news is that the freefall we saw in 2009 is over and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again.”
The Sacramento commercial real estate market is struggling due to the lack of employment growth in the area, according to Grubb & Ellis' Sacramento 2010 Forecast report. The company expects the market’s vacancy rate to remain relatively flat in the coming year.
“The Sacramento commercial real estate market is not anticipated to experience a recovery until 2011 at the earliest, when the job market is expected to turn around,” said Bob Dean, Executive Vice President, Managing Director of Grubb & Ellis' Sacramento office.
Commercial Real Estate Investment Transaction Volume to Grow in 2010
The investment market, which saw transaction volume maintain artificially low levels in 2009 as banks, CMBS servicers and other lenders delayed working through distressed assets, will start to see some of these assets finally come to market in 2010, prompting an expected increase in sales volume of 20 to 30 percent over 2009 levels. Prices, already down 40 percent from their peak in October 2007, may decline another 10 to 20 percent in order to meet buyers’ expectations.
“Many have called commercial real estate ‘the next shoe to drop,’ but that’s really an exaggeration,” said Bach. “It implies that commercial real estate could wreak damage on the financial system equivalent to the subprime residential mortgage losses, which is highly unlikely because the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages. Nevertheless, losses will mount over the next several years. If banks aren’t lending because they’re coping with losses in their real estate portfolios, this could impede the economic recovery.”
Overall, the fact that banks likely will begin writing off their losses on distressed assets in 2010 means that the capital accumulating on the sidelines will start being deployed, and highly leveraged buildings, many without the capital necessary to attract tenants, will transfer to new ownership, removing what was a major impediment to recovery in the investment market.
Grubb & Ellis predicts a number of commercial defaults and foreclosures will hit the local Sacramento market in 2010, but also anticipates that some regional lenders that cannot afford to assume the loans will offer extensions in an effort to prevent this from happening. The common theme is for sale prices to be below replacement cost.
Office Vacancy Rates Will Reach Modern-Day Record
Nationally, the office market begins 2010 approaching record-high vacancy rates and the most sublease space available since the “dot-bomb” era. According to Grubb & Ellis, a rebound in the office sector is heavily dependent upon employment, and the slow job growth inherent in a sluggish recovery will delay improvement in the office market.
“Early 2010 may see a few isolated months of hiring, but sustained growth in employment is unlikely before the second half of the year,” said Bach. “The fact that the recession has come and gone, however, should provide the certainty necessary for tenants to start making decisions. We may see leasing volume increase in 2010 as a result.”
The national office market’s vacancy rate is expected to reach 18.5 to 19 percent by the end of 2010, the highest on record since Grubb & Ellis began tracking the national market in 1986. Other leasing fundamentals are also expected to continue to deteriorate, albeit at a slower pace before reaching a growth point in 2011. The company expects the market to register an additional 25 msf of negative net absorption and rental rates to decline 2 percent in 2010, compared to 62 msf of negative net absorption and a 5% reduction in rental rates in 2009.
Free rent, relocation allowances, tenant improvement capital and lease extensions are all trends expected to continue throughout 2010 in Sacramento's office market. Net effective rents are expected to decrease throughout the year. Additional negative absorption, approximately 200k sf, is anticipated in 2010, although at a slower rate than 2009.
“As the state capital, Sacramento’s office market is driven by the activity of its largest employer – the State of California,” said Dean. “This has caused area landlords to become more competitive for this business by offering tenant concession packages.”
Recovery in Sight for Industrial Market
Despite increases in vacancy and negative net absorption, economic indicators that generate demand for industrial space saw upticks in late 2009. These include global trade, freight shipments, manufacturing activity and even retail sales. This, along with the weakness of the dollar, hints that a recovery in the industrial market could be on the horizon.
Leading market indicators for the industrial sector turned earlier than those for the retail and office markets, which is promising, Grubb & Ellis reports. The company also notes that the industrial sector is less dependent on job growth than the office, retail and multi-housing sectors, which means it could recover earlier, with vacancy rates beginning a gradual recovery in late 2010 and rental rates following in the second half of 2011.
Vacancy in the industrial sector is expected to reach 11.4 percent by the end of 2010, 70 basis points higher than year-end 2009. Landlords will have to weather 75 million square feet of negative net absorption, though that figure represents less than half of the 158 million square feet of negative net absorption in 2009. Warehouse rents will decline 5 percent, an improvement over the 6 percent decline in 2009.
Sacramento landlords will continue to offer attractive concession packages during 2010, and the submarkets with the most targeted, niche amenities will receive the most attention. With tenant demand stagnant and the development pipeline completed, Sacramento's vacancy is anticipated to hover at roughly 12 percent for the next 18 to 24 months. Also contributing to the flat vacancy rate are the lateral leases anticipated from tenants looking to capitalize on the leasing concessions offered by landlords.
Retail Sector Faces “New Normal”
With a significant recovery in job growth unlikely to get underway until later in 2010, Grubb & Ellis expects the national retail vacancy rate to continue to climb, contributing to additional negative net absorption. Recovery in retail will be weak in 2010, but it will begin to generate demand for retail real estate starting in 2011.
“It’s unlikely the shock of the Great Recession will produce a generation of frugal consumers like the Great Depression did, but on the other hand, retail sales will not bounce back to their debt-fueled levels of 2006 and 2007 anytime soon. Retailers and owners of retail real estate will need to adapt to a ‘new normal’ in consumer attitudes that may last for some time, including more conservatism and attention to value as households rebuild their savings,” Bach noted.
Several retailers in Sacramento, primarily discount stores, have announced expansion plans for the year. The current retail market, which is flush with lower rates and generous concession packages, will be positive for small specialty shops either looking to open or expand. Two retail centers in particular, The Palladio at Folsom and The Fountains at Roseville, are anticipated to continue to attract tenants in the market due to the fact they are destination centers.
Multi Housing to Benefit from Boomers’ Babies
Similar to the other sectors of commercial real estate, job growth is key for a robust recovery in the multi housing arena. The apartment market suffered in 2009 as the growing wave of residential foreclosures increased the supply of shadow units – unsold condominiums and houses being offered for rent. Longer term, apartments will benefit from the return of homeownership rates to pre-bubble levels or less, as well as increased volume of 20- to 29-year-old apartment seekers as the boomers’ kids move out on their own.
The complete Grubb & Ellis Forecast and regional forecasts are available on the Grubb & Ellis Company Web site at: www.grubb-ellis.com.
|
|
 Return to the Archive page
|
|
|
|
|
|
Printer-friendly Version
Email an Associate