In keeping with Huey Lewis’ popular 80′s movie song “Back in Time”, it appears that is where commercial real estate (CRE) is headed. Over the past two years we have seen extensive damage from the devaluation of commercial real estate assets acquired during the peak years of 2006-2007. But now a new concern is rising that properties purchased in 2005 or earlier are at risk. If that concern pans out, then billions more dollars in commercial mortgage-backed securities are facing potential credit downgrades and future property transactions and loan reviews will be subject to greater scrutiny from investors and banks, ie it will be tough to buy a building.
The average price per square foot (or per unit for apartments) is either at or less than 2004 price levels:
Property Type 2004 2009
Office $164.02/SF $168.05/SF (even)
Industrial $80.90/SF $70.66/SF (13% less)
Retail $108.71/SF $83.70/SF (23% less)
Multifamily $86,487/Unit $70,352/Unit (19% less)
Bond rating agency Fitch expects real estate fundamentals to continue deteriorating for another 18 to 24 months despite a broader economic recovery. This decline is likely to result in ratings downgrades on otherwise proven CMBS deals. Though these potential downgrades will not have as significant an impact on the economy as post 2006 CMBS deals have, they will continue to delay any sort of commercial real estate stabilization prior to 2012.
Even though the economy has shown some positive momentum of late, several sectors of the commercial real estate industry have continued to drop. The hotel sector, no big surprise here, is the most volatile and has already seen revenues per available room decline by 20% since January 2009, with many industry experts anticipating a 50% decline before bottoming out.
Office vacancies have reached 15% nationwide and will continue to rise in 2010 as layoffs continue to trickle down. Central business districts continue to fair better than suburban submarkets (ex: Portland| CBD – 9%, Westside Suburbs – 17.7%, I-5 Corridor – 20.46%), but all landlords are facing big declines in rent, significant concessions (free rent), and increased vacant sublease space.
Source: CoStar Watch List
