s we forecast the fortunes of commercial real estate this year, it's clear that the recession is affecting markets nationwide, with virtually all industry sectors absorbing job losses. As widely reported, the recession is more severe than initially expected. Moreover, it will likely get worse before it gets better. According to the National Bureau of Economic Research, the recession is more than one year old, and a recovery is unlikely before mid- or late-2009.
      Recent developments point to the further softening of real estate conditions in the next few quarters, as job layoffs intensify in almost all sectors, with unemployment claims reaching their highest level in seven years.
      Given this bleak scenario, why are so many landlords still outwardly bullish about commercial real estate? They point to the latest market statistics that show relatively low vacancy and rents that remain stable. Statistics, they say, don’t lie. Consequently, many landlords are trying to use selected numbers to their advantage.
      Uncertainty and anxiety continue to characterize the mood of the corporate community. While this doesn’t come as a surprise, it doesn’t diminish the pain. We are undergoing an inevitable market correction following the artificially inflated rents at the economy’s peak — and the markets with the biggest bubble are taking the biggest tumble.       For a more accurate reading, however, we need to look beyond the statistics and feel the pulse on the street.
      There, the prognosis is clear: It has become a tenant’s market.
      The reality is that today’s statistics are yesterday’s news, reflecting conditions that are at least six months old and not real-time conditions. Historically, commercial real estate has been a lagging indicator of economic activity by six to nine months. The process generally starts with job layoffs, often continues with office space reduction, and finally leads to disposition (through subleasing, lease expiration, or sale).
      As we trudge ahead in the first quarter of 2009, here is a more accurate view of where we stand:

• Asking rents in many large metro centers were actually down about 20 percent in the last quarter. And we expect they will decline as much as 20 percent in the next three quarters, with the compound effect of this correction being approximately 36 percent
• More companies are shutting down and shedding space, while limited new inventory is expected
• In the next quarter, we expect vacancy rates in most markets to increase by 3 to 6 percent.
• Very little trading is expected with buildings for sale in the next few quarters, as financing will be hard to secure (sales activity is down 90 percent from 2006).

      To be sure, the market will level off, and there will be an eventual return to "normalcy" (or a state of equilibrium). Activity will not likely pick up again, however, before mid-2010, since companies adding staff will fill empty pockets of existing space before they expand.
      Again, the statistics will lag behind these changing dynamics.
      Given this environment of flux and volatility, what is our advice to companies while it remains a tenant’s market?
      In general, we remind tenants that this recession has a silver lining: They now have leverage dealing with landlords who are trying to retain credit-worthy tenants. But we also recognize that even though landlords are now more willing to accommodate tenants — with concessions like free rent and better improvement allowances — they will likely continue to be stubborn for the short term. Accordingly, we would caution tenants to avoid major knee-jerk actions, especially without the counsel of a knowledgeable real estate advisor.
      Companies with leases approaching expiration should determine what assets they want to hold onto and what they might shed. Companies with longer-term leases may want to consider plans to dispose of space — this is particularly important to firms that are downsizing. If this is the case, it would be prudent to work with a project manager to "restack" space and increase efficiencies. In our view, at least, working with project managers from a larger commercial real estate firm will more efficiently integrate your outsourced services.
      In any event, before leverage shifts in the other direction, companies should assess how they can make their real estate portfolios more cost-effective. In the months ahead, we see an opportunity to evaluate more space options and lock into long-term, favorable rates. The best window of opportunity is likely to be from mid-2009 to mid-2010. It’s also prudent to review long-term strategy and ensure that business plans are aligned with real estate plans.
      Overall, this is a time for companies to be patient, strategic, and even a little optimistic. Commercial real estate is typically much more stable than the residential side. And commercial real estate advisors are prepared to help tenants protect their interests during this difficult time.
      Working together, we can withstand the meltdown and not let it soak us dry.

      About the Author: Bill Goade is CEO of CresaPartners LLC. Based in Boston, CresaPartners is an international corporate real estate advisory firm that exclusively represents tenants and specializes in the delivery of integrated real estate services.

 

©2008 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.