Up in the Air

Economy's Downdraft Is Blowing Through Commercial Real Estate

Benjamin B. Lacy and his wife Debra sipped beer and munched on beef carpaccio a few weeks ago in Munich at a commercial real estate gathering. In recent years, the Lacys have advised Germans to invest about $1 billion in office buildings, helping pump up the regional market.

But not this time.

"Everybody showed up and we had nice dinners and drank lots of good beer," he said. "But underneath was a fear of doom and gloom. We were talking up deals but the undercurrent was, 'What is going on in the U.S.?' "

For the Lacys, who run a real estate investment and advisory firm, it was another stark signal that the global financial crisis is hitting the commercial market.

With few lenders doling out money these days, commercial real estate sales -- including office, mall and warehouse properties -- are expected to be less than half of last year's record-setting $514 billion, according to Real Capital Analytics of New York. More than $14.5 billion in deals have been canceled or pulled away from this year, including about $1 billion in the Washington region, according to Cassidy & Pinkard Colliers.

In addition, growing layoffs and falling profits mean companies are giving up office space at rapid rates. Nationwide, more than 19 million square feet of space -- enough to fill more than 300 football fields -- has been emptied by office users this year, the most since the months after the Sept. 11, 2001, attacks. Locally, about 1 million square feet of office space is dark and empty, according to Reis Inc., a New York-based real estate research firm.

PriceWaterhouseCoopers and the Urban Land Institute concluded in a recently released report that "U.S. commercial real estate faces its worst year since the wrenching 1991-1992 industry depression."

Analysts say that nationwide, rents are stagnant and will probably drop. Vacancy rates at offices, shopping malls and hotels are expected to rise, and billions of dollars of loans are coming due next year.

"This is a record-setter because it transcends real estate," said John Germano, managing director of the mid-Atlantic region for CB Richard Ellis, one of the country's largest commercial real estate firms. "You've seen companies that real estate depends on like Merrill Lynch, Lehman either be retrenched, sold or go under."

Things will get worse if unemployment rises nationwide and consumers continue to cut back on spending, according to analysts. Stores and businesses would lease less space, probably resulting in a glut of office space and lower rents.

"We haven't had the second shoe drop," said Dan Fasulo, a managing director at Real Capital Analytics, the real estate research company. "You're going to see more tenants closing up shop."

"If we get pushed into a recession, all bets are off. This is affecting everybody," he said. There are a few large, blue-chip projects around the country that are having troubles -- a sign that has brokers, developers and lenders in the industry worried that even deals in good, solid locations with established developers behind them are at risk.