Home, Office, Retail: It’s All the Same Slump

Friday’s blog touched on commercial real estate and the shopping center conundrum: Too many new stores and too little consumer spending.

But, as it turns out, malls aren’t the only commercial buildings suffering from the economic slowdown. Enter: The waning workplace. Yes, that’s right, the office has become more than just a clever NBC comedy–it’s a commercial real estate crisis, according to some sources.

Retail centers in areas that saw some of the largest housing boom price and property increases–and some of the decline’s biggest drops–have fallen on particularly hard times. Office space isn’t fairing any better.

California Dreamin’ (Of Residesnts)

Take, for example, the Silicon Valley–one of California’s most coveted real estate sectors during the housing boom, the area is now in the midst of an office space bust.

At the end of 2007, residents occupied nearly 1.5 million square feet less space in office, research and development buildings than in September, according to brokerage house CB Richard Ellis.

Vacancy rates in all three sectors were also up, the Silicon Valley/San Jose Business Journal reports.

And, like the retail property decline, the U.K. has mirrored the U.S. commercial space decline.

According to prices of derivatives contracts linked to indexes compiled by London-based research firm Investment Property Databank Ltd., building owners could see losses of 11 percent or more in 2008.

In fact, some experts–like Peter Hobbs, London-based head of research at RREEF Real Estate, a Deutsche Bank AG unit that manages about $100 billion–say Britain’s 700 billion-pound commercial property market will have a worse year this year than the rest of Europe, Asia and the U.S.

Holding On To Commercial Cash

One reason the commercial sector is having such a hard time: Funding isn’t just hard to come by these days in the housing market.

Banks lost $90 billion in the U.S. mortgage mess–and they haven’t forgotten it. Lending standards are stricter and banks are more nervous about giving in general. The world’s second-largest commercial broker, Jones Lang LaSalle Inc., says U.K. transactions fell 60 percent in the last quarter of 2007, according to Bloomberg.

Then there are the big banks: Morgan Stanley, UBS, Wachovia, Credit Suisse. They ponied up most of the capital for real estate before the credit crash; in its wake, that funding is coming from insurance companies, savings banks and commercial banks.

Some say the lender shift is making larger deals–for example, giant new commercial property projects and big commercial purchases–hard to close.

"The opportunity to finance is available for less than $100 million, but there are no funds at all available for larger deals," a prominent real estate investor, who asked to remain anonymous, told the New York Sun.

And while domestic balance sheet lenders may not be as gunshy as some of the banks who got burned by the residential market, they have the law of supply and demand on their side–and they’re using it.

"Loans are at very different terms than from six to nine months ago," Eli Weiss, an associate at Ackman-Ziff Real Estate Group, with offices in New York, Miami, Boston and Los Angeles, told the Sun. "Also, since they have the pick of the litter, domestic balance sheet lenders are being extremely selective as to deals they take on. This boils down to banks and insurance companies ‘saving their powder’ for their best clients and deals that have lower-risk profiles."

Low Commercial, High Cost

So companies who have any exposure to residential projects: Sorry. That’s going to mean less projects, and less building–and a decline.

Considering that commercial real estate has picked up much of the slack for residential as housing cooled, that’s a dangerous prospect. Some states, like Colorado, depend on it: Commercial real estate is 10.5 percent of the state’s economy, a recent National Association of Industrial and Office Properties report revealed.

The Denver Post reported that commercial real estate had a $23.4 billion impact on Colorado in 2006. $23.4 billion. To put that number in perspective, the state budget for this year is only $18 billion total funds.

Anyone who follows commercial building (and should you want to, please do read Commercial Property News, one of our sister sites) knows the industry still sees activity–more projects are being greenlit in commercial building than in residential these days. And yet, it’s a big business industry, and any drop-off should be taken seriously.

Lately, the housing decline may be the hot topic to rehash in the press, but–as the economy slows and spending threatens to send us spiraling into a recession–can we continue to ignore the sad state of commercial building much longer?