Commercial real estate almost always lags the economy, and now, with many long-term leases set to expire soon, Santa Clara County's assessor predicts commercial and industrial property will be the "next shoe to drop."
County assessor Larry Stone recently told REALTOR® and affiliate members of the Silicon Valley Association of REALTORS® that this year his department reduced the value of 98,000 properties, taking a total of $19.3 billion off the county's assessment roll. Of that total, 771 were commercial and industrial properties, accounting for $1 billion of that reduction. While this year's number of commercial and industrial properties placed on Proposition 8 status is small, Stone said he expects that number to grow in 2011.
Expect a "tsunami" next year, Stone said. That's when he expects the full financial impact of the commercial sector's troubles to hit, especially if there is no improvement in the unemployment rate. Stone predicted when their leases expire, many companies will be forced to move, downsize or reduce rent.
National Association of REALTORS® chief economist Lawrence Yun expects the same scenario nationwide. Yun noted currently commercial vacancy rates remain high in most market areas and are depressing rents.
"Because of the lingering impact from the deep recession over the past two years, vacancy rates will trend higher and many commercial property owners will need to make rent concessions," Yun said.
The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 700 local market experts, suggests a flattening level of business activity in upcoming quarters with 55 percent of members expecting the market to improve in the second quarter. Nearly nine in 10 survey participants said new commercial development is virtually nonexistent in their market areas, and rent concessions are reported almost everywhere.
"We have a long way to go for satisfactory levels of commercial credit," Yun said. "Given that about $1.4 trillion in commercial debt will come due over the next three years, more extensive action is needed and the Fed needs to more actively help resuscitate commercial mortgage-backed securities. The credit improvement will mean more commercial property sales in 2010, even some at deeply discounted prices."
But Yun is hopeful. "With the job market expected to turn for the better later this year, we'll see rising demand for office and warehouse space, but that isn't likely before 2011," he said. "At the same time, improved consumer confidence would help sustain the retail sector and encourage more people to enter the rental market."
In the Silicon Valley region, Stone said the local economy is slowly improving, but he emphasized more needs to take place to get us out of the recession, and before we see some improvement in the commercial sector. Stone said corporate profits have to resume; job losses have to stop; job growth needs to take place; credit liquidity needs to improve; inventory of REOs and foreclosures needs to be liquidated; and more than anything, he also noted, the public's confidence has to rise.
Looking at the overall market, commercial vacancy rates generally will stay at elevated levels, according to NAR's latest Commercial Real Estate Outlook, which analyzes quarterly data in four major commercial sectors - the office, industrial, retail and multifamily markets.
Office Market
With a lot of sublease space currently on the market, vacancy rates in the office sector are forecast to rise from 16.3 percent in the fourth quarter of 2009 to 17.6 percent in the fourth quarter of this year; the longer term outlook is for vacancies to average 17.4 percent in 2011. Annual office rent is projected to decline 7.2 percent in 2010, following a drop of 12.7 percent last year.
Industrial Market
There is proportionately less industrial sublease space on the market than in the office sector, but obsolescence remains a factor. Industrial vacancy rates will probably rise from 13.9 percent in the fourth quarter of last year to 14.9 percent in the closing quarter of 2010; they could average 14.5 percent next year. Annual industrial rent is likely to fall 9.6 percent this year, after declining 10.9 percent in 2009.
Retail Market
Retail vacancy rates are expected to edge up from 12.4 percent in the fourth quarter of 2009 to
12.7 percent in the same period of this year, and may hold at that level in 2011. Average retail rent is forecast to decline 2.4 percent in 2010, following a drop of 4.0 percent in 2009.
Multifamily Market
The apartment rental market – multifamily housing – is poised to gain from a rise in household formation. Multifamily vacancy rates are likely to decline from 7.4 percent in the fourth quarter of last year to 6.6 percent in the fourth quarter of 2010, and possibly edge down to 6.1 percent next year. Average rent is projected to decline 3.4 percent this year, following a decline 3.6 percent in 2009.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.