Tough '09 Is Seen for Commercial Real Estate

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, January 6, 2009

This year will be among the worst for the U.S. commercial real estate industry, as unemployment leads to a drop of as much as 30 percent in rents in some places and more office towers from Washington to Chicago and Los Angeles sit empty, according to several research reports from large commercial real estate service companies.

"2009 is going to be dismal for commercial real estate," said John F. Sikaitis, director of research for Jones Lang LaSalle, a real estate services company. "Demand for space is way down. Sales activity is down. Rents are falling dramatically and vacancies are increasing. That's forcing landlords to compete and lower their rents."

Nationally, rents are expected to drop 10 to 15 percent. Manhattan rates could drop as much 30 percent. Nationally, the vacancy rate is likely to rise to 18 percent from 15.3 percent, Sikaitis said. Especially hard hit could be places where there's a lot of office construction, including the Washington region, Miami, Atlanta, Chicago and Houston.

This comes as billions of dollars in loans on office buildings, malls and warehouses are coming due in the next few years and real estate owners are struggling to refinance their deals. That could lead to banks taking back properties and force some owners to sell at a loss.

Roughly $107 billion worth of hotels, office buildings and shopping centers are in trouble, ranging from mortgage delinquency to foreclosure, according to a report from Real Capital Analytics, a research firm.

"It's not going to be a good 2009," said Dan Fasulo, managing director at Real Capital. "We're at the point where a normal, functioning market doesn't exist. Buyers are there, but they don't necessarily want to make an acquisition. Pile on top of everything that we don't have a functioning debt market. It creates paralysis in the market."

New York is projected to be among the hardest hit. The financial services industry there has been decimated by job losses, and companies are dumping office space back on the market. In Chicago, a 12 percent vacancy rate is expected to reach 15 percent or higher by the end of 2009. And in Orange County, Calif., vacancy rates could hit 19 percent from 15 percent in 2007.

In the District, vacancy rates could hit double digits for the first time in a decade, as 9.3 million square feet of office space is under construction. It could take four years to lease that much space, according to Cushman & Wakefield.

Kevin Thorpe, vice president of research at Cassidy & Pinkard, said the vacancy rate in the District could reach 11.9 percent in 2010, making it the "highest since the S&L crisis of the early 1990s."

The Washington region, unlike other places, is expected to add between 20,000 and 25,000 jobs this year, which will create a demand for office space.

"You've got $8.6 trillion that has been pledged to address this financial crisis and that's going to require significant oversight in the D.C. region," Thorpe said. "That has to translate to job growth and a demand for office space among law firms, accountants, consultants and others. Over time, demand will increase."

For landlords, weakness elsewhere in the private sector is creating a new "love of government tenants," said Keith Lipton, executive vice president and managing director of Grubb & Ellis's Washington-area offices. "They're the best tenant you're going to find. People who shied away from government tenants are now pursuing them. They are the strongest, most stable tenant out there."

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