Job Losses, Credit Freeze Keep Grip on Market

Chief economist and senior vice president Robert Bach of Grubb & Ellis, in a report titled "May You Live in Interesting Times," points out that the construction pipeline contains 90 million square feet under way at year-end 2008, the lion's share of which will be delivered in 2009. "Add in about 50 million square feet of negative net absorption, and the vacancy rate is expected to rise by two percentage points to end 2009 at 16.5%," Bach forecasts. One upshot: Tenants will gain more power in negotiating rents, with landlords offering more generous concessions packages as the year progresses.

Newmark Knight Frank reports that most US regional markets "may be better positioned to weather the coming downturn than they were in past recessions because development activity has been restrained." There are exceptions, however, including Washington DC, Phoenix, Houston and some parts of California, which have all grown rapidly in the past several years.

"Office sector employment will continue falling in the US throughout 2009, and possibly into 2010," states Dr. Peter Kozel, executive managing director of Research and Real Estate Strategies, and author of the Newmark Knight Frank report. From the beginning of 2008 through early 2010, national office sector employment is projected to decline by a total of one million jobs. As a result, "Few regional markets will be spared the resulting loss in demand for office space," Kozel says.

Bach's report explores how the commercial real estate investment and leasing markets, which both performed well during the economic boom, began to diverge when the credit markets froze in August 2007. Although office leasing continued to hold its own, with relatively stable vacancy and rental rates, the investment market nearly halted. "Property sales fell to 2004 levels as CMBS markets were frozen, banks were preoccupied with maintaining their capital reserves and insurance companies hit their annual allocations for commercial real estate lending," the report states.

Even with the sharp decline in office sales, the report cites some noteworthy exceptions to the general trend, such as the Paramount Group's acquisition of 1301 Avenue of the Americas in New York for an estimated $1.45 billion and Sherwood Equities' purchase of the 370 Lexington Ave. in New York City for $155 million. Nonetheless, the difference between the leasing and investment markets now is that the leasing markets, which held up reasonably well until the fall, "began to show greater signs of stress in the fourth quarter," the Grubb & Ellis analysis shows.

Government reports on employment show that the labor market has deteriorated sharply in the past three months, with the number of lost jobs growing to nearly 1.2 million year-to-date. The Grubb & Ellis report concludes that, even with the billions in relief programs and other measures under way to promote economic growth, "We are not optimistic about a quick recovery."