Bad news continues swirling around the commercial real estate market. A newly released joint study by CCIM Institute and Real Estate Research Corporation and an October, 2009, joint study by pricewaterhousecoopers and the Urban Land Institute essentially come to the same conclusion. 2010 is going to be a tough year for commercial real estate.
As long as unemployment remains high, commercial real estate prices will remain down and occupancy rates will stay flat. Businesses don’t expand when they have laid off employees. They contract. They give up space every time a lease comes due. Well established businesses even move out of class A properties and into Class B properties.
The overall U.S. office vacancy rate hit 17.2% the first quarter of 2010. A level not seen since 1974, shortly after I got into real estate. Rents fell an average of 0.8% from a year ago. When free rent and landlord space improvement costs are calculated in, the effective decline is 7.4% year on year.
So why are CRE titans, private equity funds, insurance companies, and other deep pockets buying commercial real estate? Simple, because this is a buying opportunity of a life time. Class A commercial real estate in downtown Manhattan at 1994 prices. Grab it while you can because this is never going to happen again.
The commercial rebound will happen at different paces for geographic regions. But it will happen.
If you caught my April 22 blog, you saw that foreigners are buying real estate in New York City and Washington D.C. Next will be Huston, San Francisco (S.F. in mid 2009 had a major foreign investor make a bold purchase of a couple of Class A hotels), and Seattle. These are the same markets the U.S. big money is moving into.
Other cities will soon see buyers move in and class B properties will also see renewed interest. But those are the cities seeing first movers.
The two areas of biggest interest are multi-family apartment buildings and luxury hotels. Multi-family apartment buildings because they are expected to make the fastest recovery and hotels because these offer the best value for the money.
It’s too soon to tell but office space and manufacturing will probably follow when unemployment begins to abate and newly hired workers need more space. Retail will be last because Americans have changed their spending habits and credit card interest rates are prohibitively high. Instead of consumers returning retail outlets in droves, they are going to continue to pay off debt and put money in savings.
You will never see the opportunity to buy high quality commercial real estate at these prices ever again.