"This has been a very difficult year in the global economy, and the impact is clearly becoming visible in commercial real estate markets worldwide," said Jeffrey M. Finn, President & CEO of NAI Global. "Markets from New York to New Delhi are seeing a rise in unemployment, a fundamental shift in financial industry practices, plummeting asset values and companies retrenching while grappling with debt and the prospect of declining markets."
One bright spot is that many commercial real estate markets were at record highs for both occupancy and rental rates when the slowdown began, and may be better able to withstand a severe recession than during previous downturns, Finn noted. "Tight credit has significantly slowed new construction and development," he said. "When the industry pulls out of the current recession, we will not see massive oversupply of product. Recovery can begin with a healthy balance between supply and demand."
"The U.S. is in recession, as is much of Europe and parts of Asia, as global markets adjust to the change in credit lending, record-setting unemployment, volatile energy prices and the resulting drop in consumer demand," said Dr. Peter Linneman, NAI Global Chief Economist and Principal at Linneman Associates. Linneman is also the Professor of Real Estate, Finance and Public Policy and founder of the Real Estate Department at The Wharton School, University of Pennsylvania. "What was globally envisioned in the summer of 2007 as a brief adjustment across the market has now become a massive restructuring with new development projects being placed on hold, property owners looking for new opportunities with existing inventory, sales and rental rate declines in nearly all sectors and vacancy rates that are setting records in some markets. The next 12 to 18 months will redefine industry practices for the coming decade."
Few countries have been immune to the effects of the global economic crisis. However, parts of Latin America and Asia outperformed their global competitors in 2008. While the U.S. and Europe faced recession, China posted 9% growth in GDP in the third quarter - less growth than expected, but a significant number considering many parts of the world are experiencing negative growth. Latin America, bolstered by new raw material discoveries and an increase in manufacturing, also resisted the global trends in 2008.
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 23rd 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.
Select U.S. Markets Highlights
Riding strong upward momentum from 2007, the U.S. office market's performance in 2008 belies the current state of the market, particularly in the Central Business Districts where supply remains tight. The national average effective rental rate for Class A office space downtown climbed 13% to $47.31 per square foot in 2008, while the vacancy rate increased 7%, to 10.3%. The national average effective rental rate for Class A office space in the suburbs rose a more modest 2% to $26.32 per square foot, while vacancy rates increased very marginally to 13%. Vacancy rates in the suburbs are expected to increase more significantly in 2009 as new projects deliver amidst weak demand and layoffs by financial firms reach outward from the CBDs.
Both vacancy and rental rates will get a boost in the longer term from a sudden and dramatic decline in new construction starts. As construction lending has disappeared, there has been a nearly 30% decline in 2008 in new construction contracts for commercial and office buildings. Few construction loans have been committed over the past 12 months, making the pipeline of new development essentially nonexistent.
The industrial sector turned in mixed results in 2008. The national average vacancy rate for bulk warehouse space decreased 17% to 7.6% in 2008, its lowest level this decade, but rental rates slipped 13% to $4.07 per square foot after holding steady the previous two years. Bulk warehouse rents are just pennies above their 2003 level.
The national average rental rate for high-tech/R&D space fall fell 17% to $8.37 per square foot despite a double-digit decline in the vacancy rate to 9.7%. The national average rental rate for manufacturing space fell 5% to $5.30 per square foot as the vacancy rate increased 3% to 7.8% in 2008. That number could change dramatically in 2009-2010 as the U.S. auto industry struggles to retool.
The retail property sector is reeling from a sudden and dramatic drop in consumer confidence and consumer spending. The late-2008 surge in unemployment and uncertainty about what's still to come have led major retailers like Target, Best Buy, Home Depot and Lowe's to curtail expansion plans and close poorly performing stores, while others, such as Dave & Barry's, Linens 'N Things, Circuit City and KB Toys filed for bankruptcy. The fragile state of the economy is reflected in the empty downtown storefronts where vacancy rates increased 14% to 7.5% in 2008, reversing the 12% decline posted a year ago. However, the national average rental rate for downtown retail space increased 7% to $51.28 per square foot. Power centers and regional malls also struggled. The national average rental rate for regional malls fell 21% while the vacancy rate nationwide increased 15% to 5.6% in 2008. The national average rental rate for neighborhood service centers also fell 10% to $18.55 as the vacancy rate increased 16% to 8.4%.
"We believe we will see further erosion in all sectors before vacancy rates and rental rates stabilize in late 2009 or early 2010," stated Finn. "Like everyone else, we are hopeful the federal TARP programs and President-elect Obama's infrastructure investment plan will help get the U.S. economy back on a growth track, and be a catalyst for improvement in the commercial real estate sector."
