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Commercial Real Estate Crash Begins with Dubai

Dubai World's credit problems are not going to seriously affect the economy of the US, but are they a forewarning of things to come? We have been hearing about the coming Commercial Real Estate Crash in the US. Well, it has happened in Dubai where overbuilding has led to a glut of space and no money to pay the mortgages. While the government of Dubai could step in and take responsibility for the debt, it appears they are unwilling to do so.

What are the risks to the US economy?

From WSJ - The (US's) $3.4 trillion outstanding in debt backed by office buildings, shopping malls and other commercial real estate is easily large enough to pose a real threat to the recovery.

The Moody's/REAL Commercial Property Price Index has lost 43% of its value since peaking in 2007, recently falling to its lowest level since 2002. As commercial property values fall, debt defaults rise.

This problem has been well-telegraphed and will likely take a long time to unwind—through 2012, according to Guy LeBas, fixed-income strategist at Janney Capital Markets. That might lessen the impact on financial markets.

But much commercial real-estate debt is held by regional banks that aren't too big to fail and that, during this slow unwinding, might be hesitant to lend more money. That should, at the very least, keep the brakes on the economic recovery.

From Bizjournals - The commercial mortgage-backed securities market has collapsed – there has not been a single issuance since mid-2008. If this huge monster lumbers unchecked, it has the potential of massive portfolio destruction, devaluation and crumbled investor confidence in the capital markets, and in any hope for rebound of commercial real estate any time soon. Our industry agrees this must not happen and looks for the Fed to exhibit strength and competence in the form of meaningful legislative rescue driven by private sector ideas.

Let's hope we can all hang on for the ride.

Buying Office Space , Commercial Real Estate , Office Space , Office Vacancy Rate

Bad News from Fed for Office Space Recovery

According to new projections released Tuesday, top Federal Reserve officials expect unemployment to remain elevated for years to come, suggesting that the economic recovery will be too gradual to create rapid improvement in the job market.

The forecast of 17 top Fed officials anticipates that unemployment rate will still be in the 6.8 to 7.5 percent range at the end of 2012. With a 10.2 percent rate in October, it is an improvement, but a slow one to get down to a healthy level of around 5%.  They stated that they "anticipated that about five or six years would be needed for the economy to converge fully to a longer run path."

As we have discussed in previous posts, the office space recovery is linked with employment.  If there are no new jobs or a slow growth in jobs, office space vacancy will remain high. What this message tells us, if it turns out to be accurate, is that the office space recovery will take at least five to six years going hand in hand with employment growth.

So what does this mean to businesses looking for office space for lease? It means that it will be a tenants market for the next five to six years with rates perhaps dropping a little in the short term and remaining stable for at least the next few years.

Businesses can make sure to take advantage of this opportunity by obtaining the services, at no cost, of a qualified tenant representative.

More info

Office Relocation , Office Rental , Office Space , Office Vacancy Rate , Tenant Representation

Jones Lang LaSalle Predicts mid 2010 CRE Recovery

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Washington Business Journal Thursday, November 19, 2009: The initial U.S. commercial real estate recovery is likely to begin in the second half of next year, according to Jones Lang LaSalle’s 2010 forecast.

Nationally, leasing demand levels are expected to bottom out this quarter and remain stagnant next year. And national office vacancy are expected to near 20 percent by late 2010.

D.C., which has a 12.3 percent vacancy rate that includes sublease space, is expected to come close to topping out at about 15 percent before stabilizing, said John Sikaitis, research manager in the D.C. office of JLL.

“We have significant supply issues with a large development pipeline but significant demand with the government looking to mitigate the problem,” said Sikaitis.

Expected boosts in the federal budget will continue to cushion the D.C. office market and shift absorption back into positive territory in 2010.

But the continued delivery of speculative construction projects in the area is expected to force vacancy rates further upward and keep leverage squarely with tenants, said JLL.

The D.C. area’s 15.5 percent vacancy rate is expected to escalate to 17 percent by the end of 2010.

Northern Virginia’s rate of 16.5 percent is expected to go up slightly to 17.2 percent and in suburban Maryland, its 18.5 percent rate is expected to go up to north of 19 percent, added Sikaitis.

One region that’s fairly tight, he said, is the Rosslyn-Ballston corridor which “outperforms the rest of the region” based on the lack of development activity and tenant demand from D.C. and areas outside the beltway.

Rental rates are expected to keep dropping through the first half of 2010 but will stabilize in the third quarter due to pent-up federal demand soaking up large blocks of vacancy in the market, said JLL.

The region’s asking rents have already come down about 12 percent since the height was established at the beginning of 2008, he said. Effective rates -- which includes rental concessions -- have come down even further, at 20 percent, and are expected to see a 25 percent decline.
End article

It looks like conditions will get really ugly in the DC area before a turnaround, even if JLL is correct on a recovery mid 2010.

Office Rental , Office Space , Office Vacancy Rate , Washington DC Office Space

Geithner – Commercial Real Estate to be problem for a long time

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In a joint congressional committee hearing today U.S. Treasury Secretary Timothy Geithner said that he expects commercial real estate to be a national problem for a long time with no quick fix.  He also said that the economy can withstand the continuing commercial real estate challenges.

On Oct. 29 (Bloomberg) he said commercial real estate woes won’t set off a new banking crisis, in remarks to the Economic Club of Chicago.

“I don’t think so,” Geithner said, when asked whether commercial real estate could set off another banking meltdown. “That’s a problem the economy can manage through even though it’s going to be still exceptionally difficult.”

My thoughts are that until job creation gets started, commercial real estate will stay in the doldrums even if the stock market is booming.

Related to job creation, Mr Geithner stated in today's hearing that he would like to see TARP money provided to smaller banks specifically for loans to small business to encourage job growth.  The problem he sees slowing this down is the negative perception the public has with banks accepting TARP money.

To me that would be a simple fix... use the funds, but call it something else.


Empty MySpace Offices Cost $1 Million Per Month

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Have you seen any ads for sublease office space on MySpace? Don’t be surprised if you do.  MySpace has around 420,000 square feet of office space in Playa Vista, California with a 12 year lease that is sitting empty. They are currently paying more than $1-million dollars a month for the Los Angeles area office space and have total lease obligation of about $350-million over the 12 year term. Rent is scheduled to go up to nearly $2-million next June. Needless to say, it is not a great time to have excess office space, especially true in California.

MySpace signed the 12-year lease in August 2008, when the number of people using MySpace was blossoming and the social network was running out of space in its Beverly Hills offices.  The lease began in June of this year. The problem is that since then is that Facebook has taken off at the expense of MySpace. The parent company, News Corp, announced recently that they will receive $100-million less than expected from Google after failing to hit traffic targets.

News Corp also announced that they will be taking a $180-million write off “as a result of excess facility space that we no longer need.”

Additional Information:
Globe Investor

Los Angeles Office Space , Office Vacancy Rate , Sublease Office Space