Reed Law Monthly - December 2009
This year was bad…can next year be worse?
Besides the complete financial meltdown and battered economy we all experienced this year, it was an especially bad year for those of us active in commercial real estate because fundamental drivers were generally depressed across property types and markets.
Rents. Rental rates were down, particularly "effective" rents. Many landlords didn’t have the ability to push rents, and felt lucky to just be collecting. Rents at the national level dropped between 6% and 14%, depending on the property type, from their peak in December 2007.
Occupancy. Leasing activity was down for all major property types. Commercial vacancies averaged 17% for U.S. office properties. Multifamily vacancies were nearly 8%, representing a 20-year high.
Transactions. Property sale activity was down by over 85% as compared to 2007 investment sales volume. When properties did come to market, more often than not the bid-ask spread was too much for sellers and buyers to accept.
Financing. Debt availability was elusive and costly. On a year-over-year basis commercial and multifamily loan originations were down 54%.
Going forward into 2010, the property sector can only start to recover if the following key areas improve:
Employment. Job growth is a needed precursor for any meaningful real estate recovery. With the U.S. employment rate over 10%, and almost 7.3 million jobs lost since the recession began, there's significant ground to make up. Most troubling is that almost half of the job losses came from the high-paying service sector.
Credit. The debt markets need to open up. It doesn't have to be the lending environment of the "go-go" days of yester year, but there needs to be some sensible underwriting and credit extension by lenders.
Government. Public policy and governmental actions need to become transparent and predicable. In stark contrast to the uncertainty of government actions which have created fear, confusion, and inertia in the property markets the past twelve months.
Lenders. Lenders need to proactively, and honestly, address the "bad" loans on their books. Until this occurs there will be an overhang of "zombie" properties and side-lined investors reluctant to start buying again.