This is Part 2 in our series, “What the commercial real estate market can expect in 2009″. In previous recessions, it was over building that caused the commercial real estate market to sink. In today’s economic climate, it is the unrealistic rise in property values and then the burst of that bubble that will sink commercial real estate prices.
Commercial office space went through a huge rise in values, but those values did not rise as high in percentage terms as the residential housing market. Housing values till have a ways to fall, but commercial office space has somewhat returned to values closer to reality.
Office values may fall lower as company’s layoff workers and close their doors. Because the S&P 500 index is down 38% from its highest levels, corporations are less likely to expand their operations without increasing stock prices. This means means that IPOs that normally are the engine behind the growth of new company’s have dried up for 2009. This means as office vacancies will not fill anytime soon, which keeps office values low.
The U.S. employment picture is not looking to good either. The U.S. economy already lost more jobs (1.9 million) in 2008 than during the dot.com bubble burst in 2001-2002. According to Economy.com, they are forecasting as many as 3.3 million job losses in 2009.
There is a small spot of hope for the commercial real estate industry. There was not much over building leading up to this current recession. So the commercial real estate market doesn’t have to absorb as much supply as the residential market. Because of the rising unemployment, office supply inventory will increase. Some U.S. markets will see higher office vacancies then others. For example, CoStar predicts that the Phoenix and Detroit vacancy rates may exceed 20%.
Clarity in the markets won’t occur until vacancies peak and prices have bottomed. The commercial markets must establish some sort of new bottom before there will be a recovery. The sooner this occurs, the sooner values can start to rise again when investment activity picks up.
This is the end of Part 2 of this series. I Part 3 I will address more of what to expect in the commercial real estate market in 2009.
Attention Banks: We buy non-performing and REO product in bulk (Residential and Commercial)
Filed under: Commercial Real Estate Tagged: | defaulted paper, Housing Market, reo, retail property
