Lack of Credit Affecting Commercial Real Estate

Washington, DC, Feb. 20, 2009--A sustained lack of credit and the economic slump will depress the commercial real estate market this year, according to an index by the National Association of Realtors.

Lawrence Yun, NAR chief economist, said all components of the index declined.

“The credit crunch has especially hammered down some components of NAR’s commercial leading indicator,” he said.

“A lack of commercial credit is a serious threat to the overall economy. The Federal Reserve needs to use the Term Asset-Backed Securities Loan Facility (TALF) to provide liquidity and support for commercial mortgage-backed securities.”

The Commercial Leading Indicator for Brokerage Activity fell 6.0 percent to an index of 109.2 in the fourth quarter from a downwardly revised reading of 116.1 in the third quarter, and is 9.1 percent lower than an index of 120.1 in the fourth quarter of 2007.

The slowing index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, is likely to weaken further over the next six to nine months.

The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of 644 local market experts, also expects a lower level of business activity in upcoming quarters. Ninety percent of respondents indicate leasing activity in their market is down, and vacancy rates are generally higher.

The SIOR index has declined for eight consecutive quarters and is 58.5 percentage points below the 100 point criteria that represents a balanced marketplace.

Given the freeze in commercial credit, investment activity in commercial real estate sectors has essentially halted, while continuing job losses are reducing the demand for space, according to NAR’s latest Commercial Real Estate Outlook.

Realtors Commercial Alliance Committee chair Robert Toothaker said all sectors are down except for multifamily. “The apartment rental market is more stable simply because home sales are depressed,” he said.

“The stimulus package is designed to create jobs, and that would eventually lead to an upturn in the commercial market,” Toothaker said.

“However, we need to quickly restore liquidity to commercial real estate lending so transactions can move forward and debt on existing properties can be rolled over.”

Losses in the job market continue to reduce demand for office space. Vacancy rates are projected to increase to 16.7 percent in the third quarter of 2009 from 13.4 percent in the third quarter of 2008.

The slowdown in consumer spending has hit retailers hard. The retail vacancy rate will probably rise to 13.4 percent in the third quarter of this year from 9.8 percent in the third quarter of 2008.

The apartment rental market – multifamily housing – has held its own as a result of depressed home sales as potential buyers seek rental housing.