Grubb & Ellis Foresees Tough 2009 for CRE

"The economy will struggle in 2009, which will dampen demand for all product types, resulting in negative absorption and increased vacancy," says Robert Bach, senior vice president and chief economist at Grubb & Ellis. Bach expects that continued job losses and shrinking GDP will contribute to "a challenging year for commercial real estate with the economy starting the year 13 months into what may become the longest recession since the 1930s."

The Grubb & Ellis economist estimates that investment property sales volume will increase by 15% this year as distressed properties, particularly those acquired in the past couple of years with floating rate debt, are brought to market by borrowers who will have difficulty refinancing. Loan delinquencies and foreclosures will increase, with more properties returning to lenders, who will be anxious to sell them, he adds.

Debt will be the hot investment type in 2009, according to Bach, who cites CMBS, collateralized debt obligations and direct investments in property debt as some of the likely categories to be favored by investors. Investors are holding an estimated $300 billion to $400 billion in institutional, private and offshore equity that they will begin to deploy in 2009, the report says.

Among the other highlights of the forecast: Office tenants generally will have the upper hand over landlords, the industrial market will begin to recover before the office market, retailers will remain even more careful about expansions than they were in 2008 and vacancies will rise in the apartment sector.

In the office market, some 90 million square feet of new space was under construction at year-end 2008, the lion's share of which will be delivered in 2009. "This, combined with a projected 45 million square feet of negative absorption, including a big jump in sublease space, will push vacancy up by two percentage points to end 2009 at 16.5%," the forecast states.

In the industrial market, Bach expects that the ongoing quest by users to operate more efficiently should sustain demand for space despite the weak economy. But with supply is expected to outpace demand, the vacancy rate will rise by 60 basis points to end the year at 9.4%. "The industrial market will recover more quickly than the office market because the construction pipeline is set to thin out sooner," Bach says.

In the retail sector, more stores will close and fewer will open, with higher vacancies and softer rental rates by year-end. "Even the luxury retailers, which are usually immune to downturns, are feeling the pain," Bach says.

In the apartment arena, "The negative forces are expected to have a slight edge in 2009, resulting in slowly rising vacancies for the multihousing market this year," the Grubb & Ellis report states. Despite new renters coming into the market who have lost their homes to foreclosure, new graduates who can't find jobs are doubling up with a roommate or moving in with a relative to conserve cash. At the same time, the apartment market faces competition from an increasing supply of unsold condos and foreclosed homes returning to the market as rentals.

Some previous forecasts have suggested that emerging markets would largely escape the financial crises now look like they were overly optimistic, according to the forecast. "This will not be an ordinary downturn, but rather a structural correction in global capital markets that will impact every sector of the economy and real estate market," the forecast concludes.