NAI Global Issues 24th Annual Global Market Report
2010 Global Market Report
Produced by: NAI Global
Tenants, Investors To Take the Reins in 2010
Rising Vacancy, Lower Rental Rates Create Tenants’ Market in 2010
NAI Global Issues 2010 Global Market Report; 24th Annual Volume Provides Review/Forecast for 202 Commercial Property Markets Worldwide
Commercial real estate markets around the world experienced the full impact of the global economic recession in 2009, according to the 24th annual Global Market Report released today by NAI Global. Rising vacancy rates and declining rental rates were evident in virtually every market sector and geography, with weak demand and a growing supply of sublease space further eroding market fundamentals.
After a turbulent 18-24 months since the market peaked, 2009 marked a year where transaction volume nearly came to a standstill as corporate tenants waited for clear signs of recovery and investors remained on the sidelines waiting for signs the bottom has been reached. As the year progressed, government intervention in the form of stimulus packages in the U.S., Europe and parts of Asia took hold and by year’s end many markets had begun to stabilize. However, with U.S. unemployment topping 10%, consumer demand and spending power at their lowest levels in decades and international manufacturing and trade proceeding at a crawl, the global recovery will take some time to truly stimulate economic growth.
“The past year was extremely challenging for commercial real estate, and we don’t anticipate much new demand in 2010,” said Jeffrey M. Finn, President & CEO of NAI Global. “We’re working with our corporate clients to help them take advantage of the current tenants’ market to reduce their long-term occupancy costs. Many tenants are able to negotiate more favorable lease terms today in exchange for a longer commitment. This ‘extend and blend’ practice is a trend we see continuing well into the next 18-24 months.”
Investors who have been sidelined by economic uncertainty will see tremendous acquisition opportunities in the coming year as banks and financial institutions clean up their balance sheets and move more aggressively to dispose of commercial real estate loans and financially distressed real estate assets, said Finn.
“The recession has been over for six months and job growth is just months away, but the fact remains it will be impossible to predict what will happen next,” added Dr. Peter Linneman, NAI Global Chief Economist and Principal at Linneman Associates. “With significant tax, healthcare and regulatory proposals still in the offing, there is little clarity as to the ultimate outcomes or costs. We’re concerned with commercial mortgage delinquency rates as they have been on the rise and could keep the commercial real estate industry in neutral for several more months.”
While the United States, parts of Europe, the Middle East, Asia and Latin America experienced a deep recession, some economies survived 2009 nearly intact. Brazil, India and China all experienced a slowdown in economic growth, international trade and manufacturing demand, yet continued to post positive GDP growth for the year, far outpacing their neighbors and global trends. Brazil is looking for increased activity in the commercial real estate sector, specifically in big cities like Rio de Janeiro, which will soon host the World Cup and Olympic Games. At the end of 2009, China began to see a sharp rise in foreign direct investment in its manufacturing sector, and is expected to post 9% GDP growth in the coming year. India is positioning itself as a leader in logistics and manufacturing, and though commercial property markets will remain soft in the short term, significant growth is expected over the longer term.
NAI Global is one of the largest real estate services providers worldwide. Headquartered in Princeton, New Jersey, NAI Global manages a network of 5,000 professionals and 325 offices in 55 countries. Now in its 24th year, NAI’s Global Market Report offers insider insight and perspective on market conditions reported by NAI experts on the ground in over 200 property markets worldwide. To obtain a copy of the full report, contact firstname.lastname@example.org.
Select U.S. Markets Highlights
Office property vacancy rates are continuing to rise, and severe job losses have resulted in increasing shadow or sublease space along with tenant inducements. The national average vacancy rate for downtown/CBD Class A space reached 13.9% in 2009, an increase of 35% over 2008, while the national average rental rate for downtown/CBD Class A space fell 21.6% to $37.09/SF/YR. Class A office space in the suburbs did not fare much better as the national average vacancy rate rose from 13% in 2008 to 16.9% in 2009 and rental rates fell 4.6% to $25.11/SF/YR.
Industrial properties are also seeing an increase in vacancy rates as the slowdown in retail, manufacturing and international trade cut into demand and delivery of new supply pushed vacancy rates higher. The national average vacancy rate for bulk warehouse space topped 11.1% in 2009, the highest level in five years, and the national average rental rate dipped 1.3% to $4.57/SF/YR.
Multifamily starts have fallen 75% in the past six months and will remain low due to the shortage of available construction capital. The sector will take longer to rebound and will not see a recovery until late 2010.
Retail vacancies continue to rise across the nation, and construction has dropped nearly 50% from its 2007 peak. The national average vacancy rate in regional malls reached 7.1% in 2009, up from 5.6% in 2008, while the national average rental rate for prime mall space fell 10.6% to $32.76/SF/YR. The vacancy rate in power centers, a favorite of the struggling big-box retailer segment, soared to 9.8% in 2009, up from 5.9% in 2008, and the average rental rate fell 6.3% to $19.46/SF/YR.
“We believe we will see a slow stabilization across the office and industrial sectors in 2010, with multifamily and retail lagging further behind,” said Finn. “We expect to see a great deal of churn across the industry as billions in commercial real estate mortgages come due in the next 18 months for properties that have lost significant value and occupancy since the market highs of 2006 and 2007. How the financial industry and investors adjust to and absorb these mortgages will determine how long it will take the industry to truly recover.”
Atlanta: The office market’s supply has far outweighed the demand, pushing the vacancy rate up to 19-22%, creating negative net absorption and declining rental rates. The office market is expected to remain flat for 2010. The industrial market slowed in 2009, and even with increasing vacancy rates and declining rental rates, leasing activity remains active.
Baltimore: The downtown office market continues to gravitate to the water as Inner Harbor East continues to build out. With asking rates hovering just shy of $5 NNN, developers have sharpened their pencils after sitting on recently-delivered product in a market that was flooded with new construction for most of 2008.
Boston: With office vacancy rates climbing to 9.5% in the CBD and 16.5% in the suburbs, there is no shortage of supply, allowing tenants with solid financials to take advantage of tenant-favorable conditions. The lack of liquidity continued to plague the investment market in 2009, and sales have been limited to smaller deals that can be locally financed.
Chicago: The downtown office market experienced four consecutive quarters of negative net growth and rising vacancies in 2009. Leasing activity is expected to pick up in 2010 as asking rents continue to slide, stabilizing the vacancy rates. The industrial market will see an increase in transactional activity, leading to an eventual market rebound.
Dallas-Fort Worth: Leading the nation in employment gains for 2009, the market’s office sector appeared to be healthy for the year. Market rents are on the increase, and many companies are looking to do short-term renewals versus making long-term decisions. The retail sector has a 9.4% vacancy rate and net absorption has been in excess of 1 million SF.
Las Vegas: Industrial inventory grew to 103 million SF, pushing the vacancy rate beyond 12%. Speculative development remains limited while net absorption remained negative throughout the year. MGM Mirage’s $8.5 billion, 18.5 million SF CityCenter mixed-use development debuted at the end of 2009 on the Las Vegas Strip. The property is expected to act as a catalyst for increased visitation, which will have rippling effects throughout the local economy.
Los Angeles: The office market saw a drop-off in demand market-wide, aside from properties associated with the entertainment industry. Higher vacancy rates, lower lease rates and tighter credit have almost eliminated new construction. Losses in international trade have contributed to rising vacancy and weakening rents in the Los Angeles County industrial sector. One bright spot is discount retailers (Big Lots, Dollar Tree, 99 Cents Only and Wal-Mart) continue to expand.
Miami: Office vacancy rates rose while rents dropped more than 10%. And with 2 million SF due to come online in the next 18 months, the CBD and Brickell markets will be hardest hit. The industrial sector suffered as transshipping slowed, smaller tenants failed and bankruptcies in the automotive and construction industries intensified problems.
New York: Office vacancies topped 11.9%, the highest seen since 2005, and asking rents have dropped $20 to $52.05/SF. However, the rate of decline and the supply of sublease space weighing on the market have stabilized. Manhattan investment sales have been few and far between; however, distressed assets are starting to appear in greater number and it is expected that foreign investors and well-capitalized investment groups will seek to take advantage of a new pricing structure, spurring the expected turnaround.
Phoenix: The office vacancy rate overall is 25%, but Class A+ product downtown and in suburban markets has reached a staggering 60%. Relief won’t come anytime soon as 2 million SF is currently under construction. Despite landlords being aggressive with rental rates and concessions, overall retail vacancy has risen to 11%. New construction has added to the problem with 2.8 million SF added in 2009, and 1 million SF due to come online by mid-2010.
Raleigh-Durham: As tenants downsized, the office market experienced an increase in vacancy rates and new sublease space, putting pressure on a market with 19% vacancy. Overall net absorption in the retail sector remains positive, with a low vacancy rate of 7% and declining rental rates. As construction continues on the Outer Loop around Raleigh, new retail opportunities will be opened at major interchanges.
Washington, DC: The amount of vacant office space in Washington trended up throughout 2009 and with over 3.8 million SF set to deliver in 2010 it’s easy to predict which way the rate will go. Still, things could change quickly if demand shows any sign of recovery.
Select Global Market Highlights
Asia-Pacific Region: For most of the economies in the Asia-Pacific region, the worst of the economic crisis is over. Commercial rents have been dropping since late 2008, and yields have risen as sellers have fewer “real” buyers. Credit markets have lower loan-to-value ratios, more stringent underwriting and higher interest rates. Since the start of the economic downturn, institutional investors have turned to the developed countries with lower risks. In countries like China, foreign investors who were active in 2005-2008 became sellers in 2009, and domestic buyers dominated the investment activity. Capital values have been hit hard, resulting in a significant amount of transaction activity. In India, 2009 was a wait-and-see period, as high land prices paid in 2006-2008 could not justify new projects at greatly reduced rents. We must note that Hong Kong and Shanghai, among others, have rebounded strongly after precipitous decline to get back to near record levels.
Canada: The Canadian economy performed surprisingly well throughout 2008, but the decline in U.S. manufacturing, trade and demand for products, forced a sharp downturn in 2009. A rebound in commodity demand helped to stabilize the economy by the end of 2009. Land prices softened and cap rates increased in 2009 and 2010 is expected to be a challenging year, with pockets of strength in western Canada. The retail sector is expected to suffer the longest as consumer spending and confidence will remain sluggish in 2010.
Europe: While most of Europe is still in the firm grip of the recession, the worst is over and recovery is on the horizon. Demand for space in the EMEA region (Europe, Middle East and Africa) remains weak across all property sectors, with office vacancy rates climbing to their highest levels since 2004. While Western Europe entered the recession with little office development, cities like Moscow, Dubai and Kiev are suffering under the weight of overbuilding prior to the downturn. Office rents have fallen across the region, and property owners are offering increased incentives to prospective tenants. Retail rents, though stable, have fallen slightly, and expansion plans are generally on hold. Industrial development activity has virtually stopped across the continent.
Latin America & the Caribbean: Latin America and the Caribbean were clearly affected by the global economic crisis, but the overall impact was not as great as previously feared. Countries like Brazil, Peru, Panama and Colombia all registered positive growth in 2009, though real estate development has slowed significantly across the entire continent. Demand for real estate in 2010 is expected to increase, as will development as developers and investors regain their confidence. The larger economies (Brazil, Peru, Chile, Columbia and Panama) will see positive real estate supply growth, and more modest economies (Mexico) will see a smaller revival. However, growth in resort and hotel development will lag.
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