The seized-up credit markets and economic uncertainty will take a toll on commercial real estate for the next few years, with rents and occupancy falling until at least the first half of 2010, said Bob Bach, chief economist with Grubb & Ellis, a commercial real estate services and investment company in Santa Ana, Calif.
“Even if we see moderate economic growth in the second half of next year, vacancy rates won’t peak and rents won’t hit bottom until sometime in the first half of 2010 — if we’re lucky,” Mr. Bach said at a news conference in New York on Wednesday.
Glen Esnard, president of the capital markets group at Grubb & Ellis, said he expects a surge in distressed real estate sales to hit the market in 2009 as debt starts coming due. When the capital markets tanked in 2007, real estate sales activity dropped off, but pricing remained resilient, he said.
The number of sales transactions was off 60% for the first three quarters of 2008 from the same period in 2007.
However, prices have not yet fallen off, since the lack of sales have made it tough for the market to price properties, and default rates are low.
All of this will change as the mountain of debt that was created in 2006 and 2007 starts rolling over in 2009, 2010 and 2011, Mr. Esnard said.
He estimates that $36 billion of commercial-mortgage-backed securities debt will expire in 2009, and $55 billion by 2012.
“A lot of that debt is not refinanceable” in the current markets, a situation that could force property owners to sell off real estate at fire-sale prices, Mr. Esnard said.
“It’s kind of like a black hole — you can’t see it yet, but because of the gravitational effects of everything around it, you know something is out there and it’s very big,” he said.
Still, Mr. Esnard sees a bright spot in the turmoil.
“We can’t stabilize our industry until we have a sense of where pricing is — and that will hit in the second half of 2009,” he said.
Once pricing is established, investors will be better able to manage their portfolios and price debt, Mr. Esnard said.
The depth and length of the current
recession is far less clear than it was during previous downturns.
“This is the third
recession that I’ve been through with Grubb & Ellis, and I think there are more question marks at the end of this one than any of the previous two, as to how we’re going to get out of it and how deep it will be,” Mr. Bach said.
“It’s the rapidity of the downturn” that’s most disturbing, he said. “It happened so quickly — starting on Sept. 7, when the government announced its takeover of
Fannie Mae and Freddie Mac,” Mr. Bach said. The Lehman Brothers Holdings Inc. bankruptcy, the takeovers of high-profile names like Washington Mutual Inc. and Merrill Lynch & Co. Inc. and the $700 billion bailout package exacerbated the panic, he said. Lehman and Merrill are based in New York, and WaMu is based in Seattle.
Mr. Bach expects medical office properties, apartments and industrial real estate to weather the
recession far better than office and retail properties will.
