priced out of the market. Of course, there’s also an opportunity for tenants to sign a long lease on favorable terms.”
Looking back, Finn remarks that the decline of office fundamentals in 2008 was dramatic. Final year-over-year statistics
don’t tell the whole story, he says, because strong numbers for
the first three quarters prevent the year’s final figures from
showing the devastation wrought in the fourth quarter alone.
For 2009, he says, both leasing velocity and rents will be down
in virtually all markets—in some cases, by 25%.
“To find the hardest-hit office markets, look for the
residential storms,” he advises. “Markets like Florida,
California, Arizona and Nevada are oversupplied with
housing because of the loss of jobs and the consequent
loss of immigration. Those markets fell early, while office
leasing in New York City, Chicago, Boston and Texas
remained strong until late in the year.
“The current market is opportunistic,” Finn explains. “It’s
harder to succeed at the top of the market than at the bottom, and we see this as a bottoming year, where opportunities will be easier to identify and take advantage of. Money is
hard to come by, though, and leverage is no longer the name
of the game.”
Not So Far to Fall
Industrial’s fundamentals are under pressure, admits Gene
Reilly, president of the Americas at San Francisco-based
AMB Property Corp. That category tends to lag the economy, he explains, so his company’s portfolio ended 2008
with 95% occupancy and strong rent growth. But he admits
that he anticipates a drop in occupancy of about three percentage points, plus negative rent growth.
“We tend to stay about 400 to 500 basis points ahead of the
overall market in terms of occupancy, so the national figure
should be about 88%,” he estimates. “That’ll be worse than
the early 1990s and worse than after 9/11. We expect a
severe downturn in the economy that will last into 2010.
“From an operations viewpoint, we’re focused on occupancy and relationships with our tenants,” adds Reilly.
“Industrial lends itself well to tenant relationships that span
many buildings and many locations. Those relationships pay
off when the market is tough. We will see rent slides; we have
to stay close to the brokerage community and be willing to
do short-term deals.”
Like in the office sector, average leases will be shorter
than usual, Reilly predicts. Tenants will be reluctant to commit if business is slow, and landlords won’t want to lock in low
rents if a recovery is imminent.
Capital deployment, he says, is not a focus for AMB this
year. More speculative players might find good buys on class
B assets in secondary markets, he notes, but the firm plans to
concentrate on primary markets and supply-constrained
“There isn’t much quality industrial product on the market,” Reilly admits. “Owners of quality industrial are mostly
in good shape, and in major markets there’s not a big danger of foreclosures on class A property.”
The story is a bit different in the second- and third-tier
cities, however. While quality assets will still be sought after,
“the absentee landlord will be at a disadvantage,” says Reilly.
“You have to pay close attention to operations.”
Craig W. Engelhardt, Hackensack, NJ-based managing
director of Studley, says the healthiest industrial markets are
those located near seaports. He points to two traditionally
strong markets that might show weakness in 2009: California’s
Inland Empire and the area around Exit 8A on the New
“Those two markets have dropped precipitously,” he
reports. “Finding quality warehouse labor has always been a
challenge because the workforce tends to flock near ports,
and both those areas are 55 to 60 miles away from a major
port. Besides, industrial goods are not immune to the economic downturn.”
Also dealing a blow to the sector is corporate America’s
tendency to outsource warehouse and logistics operations to
third-party providers, which have much larger facilities that
can accommodate multiple tenants.
It’s a renter’s market, Engelhardt says, and users that can
identify their core assets and lock into long leases at favorable rates will be at an advantage, especially since owners will
be eager to keep credit tenants even if they have to make
concessions. It’s easier to get a reduction in rent than a tenant improvement package, he adds, because many owners
are finding it hard to borrow for improvements.
“And unless a developer has a lease from a credit ten-
“We have to stay close to
the brokerage community
and be willing to do short-
AMB PROPERTY CORP.
ant in hand, you won’t see new developments,” he warns.
“We know of several spec projects that have started and
“For large owners,” he continues, “the priority will be to
secure their existing assets, to put their money into tenant
retention and filling vacancies, rather than growing their
portfolios. This year will be tough, but we may see capital
flowing again for deals at the end of 2009.”
The Shakeout Continues
The retail picture is a mixed bag, with some national brands
contracting and others expanding, some formats struggling
and others holding up pretty well. Faith Hope Consolo,
chairman of Prudential Douglas Elliman’s retail leasing and
sales division, notes that while Home Depot is shutting down
its Expo Design Centers and Starbucks is closing units,
youth-oriented apparel retailers like Abercrombie and
Hollister continue to expand.
“There’s nationwide growth in retail, in both street and
mall locations,” Consolo insists. “You’ll see expansion of
‘designer’ fast foods like Pret A Manger and Au Bon Pain
because they’re affordable. The same goes for the cosmet-ics/beauty segment, where Sephora and niche brands like
Lancôme, Clarins and MAC are expanding. In a recession, people will not buy a new suit or handbag, but they
will buy lipstick, so that segment always prospers.”