CRE Recovery Projected For 2011

Most commercial real estate sectors will bottom out late this year before embarking on a slow recovery in 2011, according to projections from Grubb & Ellis Co. The firm forecasts that commercial real estate fundamentals will decline more slowly this year than last.

‘The good news is that the freefall we saw in 2009 is over, and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again," says Bob Bach, Grubb & Ellis' senior vice president and chief economist. The company predicts an increase in sales volume of 20% to 30% over 2009's levels, with prices perhaps dropping another 10% to 20% to accommodate buyers' expectations.

Claims that commercial real estate is the "next shoe to drop" are exaggerated, Bach says. Comparing the potential commercial real estate fallout with losses tied to the subprime crisis, he notes that "the value of outstanding commercial mortgages is a fraction of the value of outstanding residential mortgages.

 "Nevertheless, losses will mount over the next several years," he adds. "If banks aren't lending because they're coping with losses in their real estate portfolios, this could impede the economic recovery.’

Grubb & Ellis expects the national office market's vacancy rate to hit 18.5% to 19% by the end of the year, which would make it the highest vacancy rate for that sector since the firm began tracking national data in 1986. The sector's recovery depends heavily on job growth. Bach projects sustained growth in employment is "unlikely" before the second half of this year.

"The fact that the recession has come and gone, however, should provide the certainty necessary for tenants to start making decisions," he says. "We may see leasing volume increase in 2010 as a result."

In its quarterly data book on commercial real estate and multifamily finance, published Tuesday, the Mortgage Bankers Association said that monthly job gains need to be in the 125,000-150,000 range in order to reverse the rise in unemployment.

"Gains of this magnitude are not expected in the months ahead," the report said. "Accordingly, the unemployment rate is apt to increase somewhat further before peaking in the spring of 2010, and then beginning a gradual, slow decline during the remainder of the year.

The industrial market, which saw increased vacancies and negative net absorption in 2009, has the potential to recovery more quickly than the office, retail and multifamily sectors because it's less dependent on job growth. While Grubb & Ellis expects vacancy in the sector to reach 11.4% by the end of the year – 70 basis points higher than year-end 2009 – a new report from the trade group Institute for Supply Management suggests the manufacturing sector is rebounding sooner than expected.

Based off results of a survey of U.S. purchasing managers, the report showed the institute's manufacturing index hit 55.9 in December, its highest reading since April 2006.

"Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction,’ TD Securities economist Millan Mulraine wrote in a note to clients, according to a San Francisco Chronicle report.

– John Clapp, editor, Servicing Management


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