U.S. Office and Retail Vacancy Continues Its Ascent

REIS is out with its latest US office vacancy numbers, and not surprisingly, they don’t look good. It’s expected that this year will end with office vacancy rates at nearly 17%, and rents down 7.4%. They are also projecting 2010 vacancy at 17.6 percent, about 1% below the high that was reached in 1992. That is an interesting fact because during the early nineties there was a severe oversupply that came online a few years before. While commercial construction was certainly up over the past few years, the supply problem is not as profound as it was earlier in the nineties, so the fact that we’ve reached early ninety levels is very telling.

The numbers mentioned above come from Bloomberg. The WSJ also has an article out with some numbers, and they cite REIS as well, except they cite current office vacancy at 15.2%, with an expectation that they will reach 19.3% “over the next year”.

On the retail front, Fitch Ratings announced today taht loss severities on retail loans will also trend upwards over the next several years – also no surprise. According to the release, data on retail vacancies was cited: in 2002, average retail vacancy was 12%. According to PPR, 2008 ended the year with retail vacancy at 15%, and the expectation is that will increase to 17.8% by year’s end.

ICSC is anticipating some 73,000 store closures during the first six months of this year. Other retail experts have announced expecatations that numbers could reach 200,000 in 2009. Going back to Fitch though, their expectation is that average losses on retail loans will be 60%, a 34% increase over the average 44% for current defaults. Earlier in the decade when Kmart declared BK, the average loss incurred on the CMBS loans secured by Kmarts was 52%, with some losses as high as 86%. Those who will be hardest hit in this market are lenders and owners of single-tenant assets who lose a tenant in this market. In fact, if the asset was acquired anytime in the last few years, it is likely the price paid will be too much to even cover the debt service most tenants (assuming one can be found) would be willing to pay. Rents in many markets simply got out of control.

Some notable examples I recall seeing over the past few years that signalled to me very clearly that things were out of whack was when I saw a single-tenant P.F. Chang’s in Las Vegas being marketed for sale at over $1,000 per square foot, and more locally a retail building in East San Jose (I think it was Alum Rock) being marketed for some $5.00 or $5.50 NNN. If I can find the flyers for those, I’ll post them, but for now you’ll have to trust my memory.

Similar Posts:

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• REIS vs. JLL – Who Will Be Right?
• US Retail Vacancies Zoom to 17 Year High
• Apartment Vacancy At 30-Year High; San Jose Leads Rent Declines
• Stuyvestant Town’s $3B Loan Goes to Special Servicing