Follow up story on troubled commercial sector

Commercial real estate is still in the early stages of a downturn, but the picture could brighten by the middle of 2010, NAR Chief Economist Lawrence Yun told attendees of the REALTORS® Midyear Legislative Meetings Thursday।

Credit markets seized up almost entirely in the days after Lehmann Brothers collapsed in September 2008 as lenders shifted to survival mode, Yun said। The economy has since shown signs of stabilizing, but credit availability for commercial real estate remains frozen.

The volume of commercial mortgage-backed security (CMBS) issuances so far in 2009 is essentially zero, Yun said, compared to just two years ago when $230 billion in loans were securitized।

Until investors show an appetite for commercial loans again, property owners face a severe credit crunch as hundreds of billions of debt comes due, he said।

In one bright spot, the federal government acknowledged the problem and the Federal Reserve plans to start buying commercial-backed securities within a few months।

In the meantime, commercial market fundamentals are eroding। With the exception of the multifamily sector, which benefits from the weak housing market, all major sectors of commercial real estate are seeing negative absorption, stagnant rents, increased vacancies, a drop in transactions and falling prices.

The multifamily sector is in only marginally better shape। Yun said net absorption for 2009 should be positive, at about 60,000 units a year. Vacancies will be about 6 percent, and rent growth a positive 2 percent.

In retail, with consumer confidence at its lowest level since tracking began in the 1950s, sales have fallen off a cliff। That’s led to a pounding in the retail property sector. Absorption for this year is expected to be a negative 15 million square feet, and vacancies are expected to be about 13 percent, up from roughly 7 percent just one year ago.

In the office sector, with unemployment growing dramatically among key segments of office workers, demand for space is declining। Absorption is expected to be roughly negative 20 million square feet and vacancies at about 16 percent, up from approximately 12 percent in 2007.

The industrial sector is seeing net absorption at a negative 40 million square feet and vacancies at about 12 percent, up from about 10 percent in 2007।

The huge infusion of stimulus money into the economy will eventually yield results, although how sustainable and robust the growth will be is uncertain, Yun said। He predicted GDP will shrink 2.9 percent this year and grow 1.4 percent in 2010.

Inflation remains less of a concern than deflation right now, despite the huge infusion of money by the government into the economy। Yun forecast the main consumer price gauge to drop 0.8 percent this year and rise 1.7 percent in 2010. But any consumer price prediction is fraught with uncertainty now because of the looming impact of the huge fiscal stimulus working its way through the economy.

Unemployment is expected to rise to 9।5 percent for the year and then rise further to 10.2 percent in 2010. That would be almost twice the 50-year average for unemployment, which is 5.9 percent.

There is one silver lining: Long-term growth, driven by favorable demographic trends, will lead to an improved economic outlook despite the pain in the short-term.