MONDAY, JANUARY 04, 2010
by Midwest Real Estate News ReportsChicago |
| Shawn Mobley, executive president and managing director of Grubb & Ellis' Chicago offices |
In trying economic times, you take your good news where you can find it. This means that the prediction from Grubb & Ellis Company that commercial real estate will decline more slowly in 2010 than it did in 2009 has to qualify as good news.
Grubb & Ellis released its 2010 Real Estate Forecast in early January. In it, the company reported that commmercial real estate funamentals will continue to struggle in 2010. But things won't be quite as bad as they were in 2009. Grubb & Ellis reported that most property types will hit bottom near the end of this year and then begin a slow recovery in 2011.
At least, then, there is hope in the report.
This holds true, too, in the Midwest. For instance, the Grubb & Ellis report states that in Chicago the three overriding trends in 2010 will be a continued lack of demand, low volume of investment sales activity and growing number of buildings becoming vacant because of cash-strapped landlords' inability to offer the incentives necessary to attract tenants.
"Simply put, we need to see some job growth," said Shawn Mobley, executive president and managing director of Grubb & Ellis' Chicago offices. "We're getting into a situation where tenants will have the ability to negotiate very competitive lease terms, but not necessarily in any building of their choosing - landlords with money have the luxury of holding out for better times, and some of them are exercising that option. On the other side of that coin, landlords with highly leveraged assets just can't afford to deal in this market, so they're not. Both factors are limiting the pool of buildings tenants can choose from to get the best terms."
The news is similar across the nation.
"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 and chief economist of 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," Bach said.
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 increase in sales volume of 20 to 30 percent over 2009 levels, the Grubb & Ellis report predicts. Prices, already down 40 percent from their peak in October of 2007, may decline another 10 to 20 percent to meet buyers' expectations.
In a particular bit of bad news, 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 percent 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 million square feet of negative net absorption and rental rates to decline 2 percent in 2010.
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, 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.
Although many companies continue to divert shipments from West Coast ports to East and Gulf Coast ports, Los Angeles still ranks No. 1 on Grubb & Ellis' Investment Opportunity Monitor. Chicago made this list at number 7, the only Midwest market to crack the top 10.
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.
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 college graduates had trouble finding jobs and the growing wave of residential foreclosures increased the supply of shadow units - unsold condominiums and houses being offered for rent.
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