Real Estate Forum - February/March 2009

Forecast

Despite significant new development slated to come on line this year, with 3. 6 million square feet under construction, Transwestern says the impact will be lessened by the strong preleasing that has taken place at each project. “All of the developments are 70% to 100% preleased, so the majority of space has been accounted for,” says Tamara Kos, the executive vice president who heads up leasing in Transwestern’s Chicago office. Still, the firm forecasts further slips in occupancy and rents throughout 2009.

“With the state of the debt and equity markets, it is very difficult for developers to finance a new building, even with significant preleasing,” she says. “We won’t have any

Distressed Assets Potentially Troubled

Value
$878M
$2.5B

Properties
29
93

&

Review
Annual
63rd

2010 deliveries. We may have a 2011 delivery if someone manages to get something financed, but right now, that’s almost impossible, so that’s going to slow things down.”

Chicago, Kos says, has sustained a far less severe hit than some other markets due to its diversified business base and moderate rents. “I don’t think we’ll look like New York City in terms of layoffs, consolidations and business failures.” She continues, “We won’t see as many hurdles going forward that many of the other marketplaces will be facing from having been overdeveloped in the past.”

Industrial occupancy, rents and construction have fallen as demand began to wane. However, the city’s diverse industries may be its saving grace, keeping absorption positive. Analysts expect the industrial slowdown to continue for at least the remainder of this year.

Craig Meyer, head of Jones Lang LaSalle’s industrial and logistics practice, highlights Chicago’s unique strength as a central distribution point for the country. “Relative to retail, office, multifamily and other product types, industrial will fare better across the board for a number of reasons,” Meyer says. “Construction was pretty limited, and the sector didn’t enjoy the same run-up in pricing to the extent that some trophy-class office buildings did.”

Meanwhile, multifamily has softened slightly, but is expected to remain relatively strong through 2009. Metrowide occupancy is forecast to fall to about 93% by year’s end, as jobs losses continue with an estimated 51,000 cuts in 2009, while 2,230 new apartment units are expected to come on line, according to Marcus & Millichap. Still, the firm projects asking rents will climb nearly 2% this year.

Ralph DePasquale, a senior investment advisor at Hendricks & Partners, says he doesn’t anticipate significant losses in occupancy this year, and that stunted development will provide a strong base for the market in the future. “There’s not going to be a supply and demand issue—just demand,” DePasquale says.—Cari Brokamp

DALLAS

Though the Dallas/Ft. Worth market has been insulated from most of the nation’s economic woes, experts suggest the area is starting to feel some pain. As a result, 2009

could be a rocky year for real estate, depending on the submarket, product type and who you talk to.

“It was a tale of two markets last year,” says Jeff Ellerman, vice chairman with CB Richard Ellis’ office. “The first half was fairly resilient, with good activity and deal flow, even as the rest of the country was suffering a downturn.” Then came September and the string of bank failures. “Things ground to a halt,” he says. “What we’ve seen here is a real significant decrease in the velocity of transactions.”

Property fundamentals began showing a bit of wear and tear toward the end of last year. Delta Associates reports that absorption slowed in the office and industrial sectors, while vacancies increased. Total net absorption of office space was negative 145,000 square feet, while direct vacancy, including sublet space, penciled in at 17.2%. And though Q4 net absorption on the industrial side was positive at 1. 6 million square feet, it was down from the 5. 3 million square feet leased in the previous year. The industrial vacancy rate closed out 2008 at 9.8%.

Meanwhile, Dallas’ multifamily market has withstood the full brunt of the downturn, with a restrained level of shadow rentals, says Tom Warren, an associate partner at the local office of Hendricks & Partners. Area job growth has also meant rental growth. However, Ryan Reid, CBRE’s SVP of multi-housing sales, warns there are a lot more units

Distressed Assets Potentially Troubled

Value Properties $266M 18 $2.5B 117

in the pipeline than there are jobs to be created.

M/PF YieldStar reports multifamily occupancies dropping to 91.4% by the end of 2008, a decline of 2.7% from the year before, thanks to negative absorption of 5,870 units in Q4. Aggressive construction, says M/PF, will hike up inventory this year. “Our crystal ball says we’ll still gain between 50,000 and 60,000 jobs in 2009,” Warren says. “But nobody knows how deep this recession will be. If oil prices stay down long enough, it will start tempering job growth.”

Most sectors are forecast to rebound this year. CBRE SVP Josh McArtor believes the level of shock is moving out of the market. As people understand the reality of the new pricing realm, he says, things should move forward. “We’re likely to see an uptick in sales activity during the second half, once the smoke clears and everyone understands the new rules of the game,” he says.—Amy Wolff Sorter

DENVER

Denver commercial real estate experts are strapping on their armor in preparation for a challenging 2009 after avoiding getting slammed last year as hard as other major markets around the country last year. As a result of growing unemployment—what Rob Link, EVP and branch manager for Studley, calls the “wild card” that has yet to hit the region—vacancies are expected to rise into this year, putting downward pressure on commercial rents.