In April 2007, we issued a report headlined The Second Wave of the Housing Tsunami: 2007-2011 in which we suggested commercial real estate was likely to be the second shoe to drop in what was already an unnerving collapse in the residential housing market.
Some of the more speculative plays we issued in the report panned out well for those inclined to follow them. A Countrywide put closed at a 417% gain. Another put on the “financial select” SPDR closed up 172%. And a third put on Lowe’s home improvement closed at 93%.
Today, we take another look at commercial real estate (CRE) because, despite headline-grabbing debt crises in Dubai, Greece, California and Illinois, CRE has continued to get worse.
(An aside: During the run-up in housing and commercial real estate, The New York Times Magazine called us “doom enthusiasts” because we saw the bubble brewing and recommended people steer clear and buy gold. It’s getting harder to remain enthusiastic when the doom pervades even the gold market…)
Office vacancy rates hit a near 17-year high in the second quarter, CRE research firm Reis announced today. 17.4% of all American office units for rent are now empty, a 1.4 percentage point rise from this time last year – around the time this supposed “recovery” began.
Since early 2008, when vacancy rates began falling, the total rented office space in the US dropped by 133 million square feet. That’s 4.7 square miles of nationwide empty offices…enough to cover Central Park more than three times over.
To make matters worse: Effective rents (what tenants pay for office space) fell 0.9% from the first quarter and a whole 5.7% from the year earlier.
To the best of our knowledge, rising supply and plummeting prices are signs of a market in trouble…especially considering this great “recovery” we’re in. While stock markets may have rebounded, commercial real estate prices are up only 4.7% from their bottom, says Moody’s. And their nationwide average is still down a stunning 41% from the 2007 top.
Most estimates suggest that US commercial real estate owners are facing over $1 trillion in maturing debt – the kind that will demand refinancing – over the next five years.
One guess which city is not sharing in the depressed commercial market: Washington DC, of course. Only 10% of office space is vacant there, the lowest of the 82 US cities Reis tracks.