HERNDON, Va., October 27, 2009 – Despite lagging commercial real estate conditions and diminishing rents and values in every market sector, some signs of optimism emerge from developers, owners and investors who expect slight GDP growth and an improvement in credit liquidity in 2010, according to the annual "Vital Signs" survey conducted by NAIOP, the Commercial Real Estate Development Association.
Respondents say that an increase in consumer and business confidence will likely result in an increase in household and corporate spending throughout 2010. Although the capital market disruption in fall 2008 produced destabilized industrial and office markets and new development in 2009 was sparse, 44 percent of respondents say that borrowing in 2010 will be somewhat more available with funds chiefly from banks, private investors and insurance companies.
Government stimulus packages had little effect on the respondents' businesses, with 71 percent feeling no impact and less than one-third reporting that they'd directly or indirectly participated. Only 8 percent reported participating directly with government programs, such as TALF and funded or expedited infrastructure projects.
In its eighth year, the Vital Signs survey, conducted in early September by NAIOP and compiled by CB Richard Ellis Investors and CBRE Research, brought together the unique assessments of 397 developers, owners and investors.
"The Vital Signs survey is an effective annual barometer of what our industry is seeing every day," said Douglas Howe, NAIOP chairman and president, Touchstone Corporation, Seattle, Wash. "Obviously the volatile markets of the last year have created great concern for those seeking capital, and the decline in development is the consequence. While the overall consensus of this survey is somber, there's hope that most indicators will at least stabilize in 2010."
"NAIOP members are feeling the pressure from rapid shifts in the economic and property market environment, as the Vital Signs Survey results show," said Doug Herzbrun, global head of research for CB Richard Ellis Investors, a subsidiary of CB Richard Ellis. "Within these generally subdued responses, there are important differences between regions and property types that provide us with valuable insights into the environment next year and beyond."
The Report Findings
The economy has at best bottomed out. About 37 percent of members pointed out the United States is in a recession, while 58 percent sees the economy as flat. It is expected that the end of 2009 will yield slight GDP growth and this will continue to improve in 2010.
The credit crisis remains a huge factor. In 2008, only 28 percent of the respondents felt that borrowing was getting better. In 2009, that number remained basically the same (29 percent). In 2009, 64 percent of respondents felt that borrowing money was the same or somewhat easier than a year ago. Confidence improved for 2010, with 80 percent of this year's respondents indicating that borrowing money will remain difficult or become somewhat more available, mainly coming from banks, private investors and insurance companies. The lack of financing is still a major concern for 2009 respondents, behind the economy and demand.
Industrial markets continued to weaken in 2009, with a little optimism for 2010. The majority of respondents felt that industrial rents declined in 2009. This is consistent with the increase in industrial availability rates this year, driven by the decline in retail spending, slashed inventories and import reductions. In 2010, almost 32 percent of respondents feel that rents will improve as industrial availability rates start leveling off. New industrial development remains slow in 2009 and will be almost non-existent in 2010. The manufacturing sector is expected to improve during the rest of 2009 and into 2010 due to a variety of factors such as the "cash for clunkers" program (which basically eliminated the excess automotive stockpiles); a ramp up in corporate technology spending; and improving global export markets.
Office has been decimated by a lack of demand. Almost all the respondents saw office rents deteriorate in 2009; most expect rents to level off in 2010 with a few markets expecting a slight increase. Office vacancy rates are expected to continue to increase in 2010 and level off by the end of the year. Much of the increase in vacancy rates continues to be in markets heavily impacted by the residential meltdown, but financial, technology and even energy centers are hardly unscathed. The biggest concerns in 2010 were from Southeast/Florida, Pacific/California and Western Canada where respondents expect continued softness in demand and rental rates. Concerns include prolonged job losses and a fragile recovery with business confidence remaining weak, affecting long term decisions and potential expansions. Office demand is expected to remain muted in 2010.
Investment activity remained weak in 2009 but 2010 looks better. Overall investment activity is down 90 percent compared to a year ago. Deals are limited despite a slight thaw in equity and debt capital availability as compared to a year ago. The challenge remains the continued gap of seller and purchaser expectations. The most active office product being transacted remains prime, stabilized assets with credit tenants where there is some competition among buyers. Also, a probable wave of troubled assets is coming on the block. Values have deteriorated due to lack of investment demand, surging cap rates, the softening of rents and widely anticipated income decreases during the next year. Investment demand declined in all property types in 2009 compared to 2008 as investors maintained a wait-and-see attitude. The average transaction size has also decreased in the past year due to the limited availability of prime investment product and the constraints in capital availability. While investment interest has recently increased, it has not resulted in any improvement in transaction volume to date.
New development in 2009 was virtually non-existent. Although a substantial amount of space was completed during the past 12 months, new development undertaken has been modest in 2009. This falls in line with the rental rates deteriorating and no immediate improvement expected. Virtually none of the respondents viewed office or industrial development positively - a far cry from the heady years when development interest was in the mid 40 percent range. Interestingly, 56 percent viewed mixed-use development favorably while 30 percent viewed biotech/life sciences facilities positively in terms of development. A shortage of health care and research product, combined with aging demographics becoming a more paramount demand driver, should re-ignite construction in these sectors, potentially before the office and industrial sector.
For further information from the survey or to learn more about NAIOP, visit www.naiop.org. Members of the media interested in receiving a complimentary copy should contact Kathryn Hamilton at (703) 904-7100, ext. 165, or hamilton@naiop.org.
About NAIOP
NAIOP, the Commercial Real Estate Development Association, is the leading organization for developers, owners and related professionals in office, industrial and mixed-use real estate. NAIOP comprises 15,000 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit www.naiop.org.