KEY POINTS:
As the chances of a United States recession increase with each new batch of economic data, some investors worry that commercial property could follow residential housing down the path of steep decline, leaving behind unpaid debt that would be difficult to unwind.
"Real estate is a derivative of the economy and credit. If the outlook for those two items is not good, that obviously affects real estate," UBS analyst Alexander Goldfarb said. "Clearly, expectations of growth have changed significantly."
A crisis in the credit market has led to tighter lending requirements, forcing some sellers to dramatically reduce prices and in some cases to take properties off the market.
Demand for space is also down compared to 2006 when pent-up demand by businesses was still causing them to snap up space.
According to preliminary data by real estate services firm CB Richard Ellis Group, the fourth-quarter of last year's vacancy rate for US offices, the largest commercial real estate group, inched up to 12.8 per cent from 12.6 per cent from the third quarter.
While US downtown office vacancies remained unchanged at 10.3 per cent, suburban office vacancies rose to 14.2 per cent from 13.9 per cent in the third quarter.
Last year the amount of space tenants rented over and above the amount of space they vacated (called net absorption) fell 24.5 per cent, according to Property & Portfolio Research (PPR).
The firm expects this to fall another 15 per cent this year.
Since 2003, the US commercial real estate market had been riding a wave of high prices as investors, loaded with cheap debt, bought shopping centres, apartment houses, distribution centres and office buildings.
As interest rates fell, prices soared. And rents went through the roof with demand.
But the boom times are gone. On Friday, the US Labour Department reported that employers added only 18,000 jobs last month and that the unemployment rate reached 5 per cent, its highest rate since October 2001.
That sent the MSCI US REIT Index, a yardstick used to measure real estate investment trust share performance, to 803.04, its lowest level since November 2005.
Weakness in commercial real estate demand is concentrated in previously hot housing markets in Florida, Southern California, Phoenix and Las Vegas, PPR said.
"Housing-related employment declines in those areas have impacted the demand for office space," said Joshua Scoville, PPR director of strategic research.
- REUTERS
