Credit Crunch, Economy Squelch Office Sales

In its latest "Global Capital Trends" report, RCA says that the capital markets disarray and economic woes "halved commercial property sales" in the first half of this year compared to the first half of 2007. The office sector fared a bit worse as sales fell 60% to $108 billion from $268 billion in the first half of last year.

Along with the overall decline in sales, the RCA report shows the Americas lost their ranking as the most active region for office building sales, with Europe taking over that distinction. Although as the report notes, "sales fell dramatically in both regions from 2007 levels." By contrast, the Asia Pacific region showed steady activity compared with the Americas and Europe.

RCA's research pointed to some large deals that have closed despite the downturn in sales worldwide. Among those that were cited was Macklowe Properties' sale of 540 Madison Ave. and Two Grand Central Tower New York City to Boston Properties. "Macklowe was able to work through a difficult situation to execute the largest office sales in US history at one of the top psf prices ever recorded," according to its observation.

Despite the New York City sales and some other examples of large closings, the team concludes that "no region has been exempt from the credit crunch." Portfolio sales in particular have suffered, dropping 73% worldwide to $18 billion on a year-over-year basis for the first six months of 2008. With investors finding debt scarce for large portfolio transactions, they have shifted their focus to one-off property deals, the team finds.

The changing credit conditions and the economic slump have also altered the geographic distribution of sales. "Dramatic shifts in the capital flows for commercial property became evident in the first half of 2008," RCA researchers say. Tokyo overtook London and New York City as the world's most active sales market as investors began favoring Asian markets. "Sales activity plummeted in the developed Western economies," the report states.

RCA is one of a number of research organizations, individual researchers and real estate services firms that have been tracking and commenting on the factors affecting the office market, ranging from the credit crunch to the general economy to consumer spending, energy prices and employment. At Grubb & Ellis Co., for example, senior vice president and chief economist Robert Bach points out the connection between the office market and employment.

Bach's latest research shows that total non-farm employment peaked in December 2007, capping an increase of 5.5% over the 73-month period since the economy hit its most recent trough in November 2001. "The fact that job growth was slower than in the prior two expansions suggests that layoffs may be muted now," he observes. However, a final comparison between this downturn and previous downturns won't be possible until the Bureau of Labor Statistics issues its 2008 data early next year.