Latest Commercial Real Estate Market News & Investment Advice in Los Angeles

Financing is Expected to Ease

August, 2011
by Karl Niehaus, President, CREI

Commercial Overview:

OFFICE OVERVIEW & OUTLOOK: Office properties have experienced a downturn similar in magnitude to the last 2 cyclical recessions, with landlords experiencing a 17.6% vacancy rate. The good news, the office market will recover. Based on muted expectations for the next 6 months, and assuming the absence of another recession, office vacancy is expected to peak in early 2011, then plateau until office using job growth regains momentum in the 2nd half of 2011 as the private sector job growth returns and companies take advantage of low-cost office space ahead of the next growth cycle.
RETAIL OVERVIEW & OUTLOOK: Price appreciation in 2004-2007 dwarfed commercial real estate fundamentals, as cheap and plentiful debt boosted sales volumes and valuations. Property prices departed from rent correlation with cap rates at record lows in 2007, which have now corrected by 40% with vacancy climbing to 10.2% in the 3rd quarter of 2010. Aside from modest quarterly fluctuations the vacancy rate may not peak until the 1st quarter of 2011. With the retail development market at a near standstill, slow and steady recovery is expected as financing and the employment markets recover. The job market is crucial as it will spur income for retail spending.

Economic Overview:

SHORT TERM TURBULENCE, LONG TERM RECOVERY? Financing is expected to ease, but tight underwriting is here to stay, even as the commercial mortgage backed securities market expands and banks become more willing to lend. In 2011, investors should take stock of 2 fundamental points: the worst is over, and capital markets have improved faster than expected. The most important reference points include employment and retail sales, which are no longer in freefall and have stabilized. With occupancy levels at or close to bottom a gradual recovery will begin led by industrial & retail and followed by office properties. The core of the financial crisis – the housing market, is no longer a severe drag on the economy, though its remains inconsistent and generally weak.. It is however important to place the statistics in perspective, as although we are no longer at the housing high of 2006, new and existing home sales align closely to the annual average from 2003. A slow recovery back to normality is expected this year.

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