2010 may look much like 2009 in commercial real estate
“A disconnect remains with buyers and sellers regarding cap rates and sales prices for commercial properties,” said Theron Bryant, senior leasing specialist at SCM Real Estate Services. “Most property transactions are only out of necessity due to an upcoming loan expiration, low occupancy or capital shortfall needed for improvement.”
Or, as real estate specialist Brent Somers, of Phillips & Reiter PLLC, said, it’s a “have to market.”
“If you don’t have to move, you don’t. If you don’t have to sell, you don’t,” he said. “And, of course you can see the problem that creates in the real estate market.”
Bryant said well-funded buyers continue to wait on the sidelines, expecting the worst is yet to come in commercial real estate.
“It seems that buyers looking for opportunities are staying in contact with both traditional lenders and nontraditional debt sources waiting for a distressed sale through the lender,” he said. “However lenders have been slow to take action on foreclosure proceedings and delaying the inevitable. Unless the market turns, lenders will have to begin foreclosing on more properties in 2010 and 2011 which at that time I think you will begin to see more buyers jumping in the game.”
Office
Local real estate experts say the 2010 office market will likely be filled with more of landlords and tenants not seeing eye-to-eye. Many landlords are stuck on 2007 values – and will not take less for their properties – while buyers are looking for deals in the market. Sperry Van Ness Adviser Trevor Dyck said this disagreement about what a property’s sale price should be, called the bid and ask spread, is about more than pure value.
“My clients don’t care. They’re not going to mark their properties down and make a floor for the market,” he said.
As Jones Lang LaSalle Managing Director Todd Burnette sees it, a floor already has been made – at least in downtown Fort Worth office space.
According to Jones Lang LaSalle data, overall vacancy rates in downtown Fort Worth office Class A direct space is at 11 percent currently, which when added with the area’s sublease space, is nearly double the reported vacancy in 2008. Burnette said the Downtown office market saw negative absorption in 2009 of 130,000 square feet compared to 500,000 square feet of positive absorption in 2008.
“What that’s telling you for the forecast into 2010 is while the economy has been improving … there is still uncertainty with government programs, and businesses not sure how those will impact them,” Burnette said. “So I anticipate activity to still be flat – similar to what we’ve been seeing in 2009. Rates, while they may fall a little bit, will not change much, but there will be 12 to 18 months more of this really being a tenants’ market and when the deals do show up, they will be aggressive.”
Burnette said his firm reports traffic in Downtown office space is down 60 percent to 70 percent and deals are dragging out because of tenant fears, financing or indecisiveness on the part of the tenant.
All of those factors have played a role in driving down rental rates.
Burnette said asking rates for Downtown office space are down 8 percent and completed deal rates are down 15 percent to 20 percent from peaks in late 2007.
Cody Payne, senior adviser at Sperry Van Ness, said the office leases he is seeing in the Metroplex’s mid-cities area are full of incentives to get tenants in.
“What I’m seeing in HEB and Arlington is leases for $1 and $2 below asking [per square foot] and an average of one month of free rent per year of the lease signed,” Payne said because landlords don’t want to cough up cash for tenant improvements, or TI.
Even medical office buildings – seen earlier this year as a saving grace in a declining office market – have taken a hit due to political uncertainty, according to Dyck.
“Medical groups are scared,” Dyck said. “They’re unsure about what’s going on with billing and insurance and how the health reform might change their industry. And they’re not doing a lot right now. Earlier this year that was a hot sector but not anymore.”
Payne said he is seeing increasing activity in Class B office space – both ingress and egress – in the mid-cities area of Tarrant County with Class B space tenants able upgrade to Class A space with comparable rental rates and tenants in Class C space able to make the same upgrade to Class B. The only class left out in the cold, Payne said, is Class C.
In the Downtown market Burnette said Class A continues to battle a mounting sum of available sub-lease space, which is currently at about 215,000 square feet.
“The sublease space has created more options for tenants than ever before,” Burnette said. “Economics are more important than ever. Tenants are looking to improve their space, have more efficient space or move to a building to take advantage of the market – with new Class A office space leases today at rates from six or seven years ago.”
Industrial
Tarrant County’s industrial market also has struggled in recessionary 2009 with activity down “dramatically,” according to Burnette.
According to Jones Lang LaSalle data, Burnette said Tarrant County industrial vacancy is at 11.7 percent today compared to 9.6 percent at the same time in 2008 and 7.7 percent at the same time in 2007.
“There’s been a lot of construction that has been finishing up,” Burnette said. “Rates are down and there’s free rent as well. New industrial deals are probably seeing a month’s free rent for every year of the lease with finish out concessions. We don’t see any new construction on the board so I don’t anticipate any new product on the market.”
Burnette said the rising vacancy rates can be attributed to new product hitting the market in 2009 as well as tenants vacating as the economy worsened.
“Manufacturing has been dramatically impacted by the economy,” he said. “If anything in Fort Worth there has been more activity for smaller type spaces. Fort Worth has been characterized by smaller industrial tenants so spaces that are under 50,000 feet are seeing more activity than spaces larger than that and the bulk of the activity is with small distribution type companies.”
In recent years, the Tarrant County industrial market has seen some amount of business thanks to the Barnett Shale, a natural gas formation found in the North Texas region. Many natural gas supply companies have moved to the area and inked industrial space leases in recent years to establish themselves in the market. But, those leases recently have died off.
“Most of the companies that have come in to provide services for Barnett Shale are already here and we’re not going to have new companies move in every year since there are only so many of them that can operate in this region,” Burnette said.
Overall, Burnette said the recovery of the local industrial market will be tied directly to the economy.
“Housing, retailers aren’t expanding right now so they don’t need supplies like lumber, nails,” he said. “When those things take off again, then you’ll start to see an increase in the warehouse space needed and that will translate into an increase in the industrial market.”
Retail
Certainly the most feared sector in commercial real estate today is the retail market and local retail real estate brokers say 2010 will see non-performing retail assets weeded out while established products limp on.
Burnette of Jones Lang LaSalle said the retail market is “the worst of all of the sectors.”
“It’s devastating … retailers are surely not expanding right now and I think the retail market has a longer road to recovery ahead of it than the office or the industrial market, which will both come back quicker than retail,” Burnette said.
James Blake, managing director at Sperry Van Ness, said 2009 was filled with concessions – all made by landlords – and next year might be the same story.
“It’s going to be flat,” Blake said of the 2010 Tarrant County retail market. “I don’t see activity picking up tremendously after the holidays. People are waiting to see what’s going to happen next year and most are holding on to what they have.”
For those in the market for new space, the concessions will be tempting, said Roger Smeltzer Jr., partner at Strategic Commercial Real Estate. And landlords are beginning to offer the No. 1 concession retailers are looking for: free rent.
“Free rent, free rent and free rent and then they might throw in some free rent,” Smeltzer said. “Rates have been cut but I’m seeing more and deals where rates were cut and landlords are providing a plethora of free rent … and next year, I think the landlords that don’t offer at least minimal free rent are going to see their spaces sit empty for a while longer.”
As for retail property sales, Smeltzer said they are happening and will likely continue to happen, but at low cap rates.
“They’re no longer buying on a projected cap, not that everybody did, but some did and they’re getting burned right now,” Smeltzer said. “There’s money on the sidelines right now and I know people keep hearing the term, but there really is. And like everybody else, we’re waiting for those bank-owned properties to hit the market and when they do, it will be on. Those people on the sidelines will be ready in a heartbeat. It will happen – I’m surprised it hasn’t happened yet – and no one wants to say it, but everybody is thinking it will happen in 2010.”
Blake said his firm has seen a few commercial foreclosure products hit the market and when they do, his phones light up.
“It’s crazy when we get a foreclosure,” he said. “I think that shows what kind of hysteria there could be when those properties finally start hitting the market.”
Bob Young, managing director of the Weitzman Group, said the Tarrant County retail market will indeed struggle in 2010, but outperforming areas such as Hillwood’s Alliance Town Center in north Fort Worth or the West Seventh Street corridor near downtown Fort Worth, will prosper.
“So what that means is that the area still has positive fundamentals,” Young said. “We won’t come to screeching halt, but damn near, so where there is already critical mass or good fundamentals for retail development, they’ll probably get their fair share or keep their people, but any other will have to wait for tenants.”
Blake said the local retail market is not all bad, but like the retail industry itself, “everybody’s looking for a deal” in retail space right now.
