Page 14

CRE Finance World, Summer 2012

Risks to Recovery in Commercial Real Estate San Francisco performed relatively better, with some submarkets stuck for at least a year. Furthermore, both asking and effective like Union Square and Waterfront/North Beach now boasting rents rose by 0.1% in February, the first time both measures of rents above 2007 peaks. However, the tech sector wasn’t at the pricing posted an increase since the first quarter of 2008. epicenter of the last downturn; when San Francisco served as the poster child for the tech bust back in 2000, office rents rose Figure 2 by 54% in a single year, only to endure declines for four straight Retail Net Absorption and Vacancy years. Effective rents ended 2011 at $32.30 psf, a far cry from 2000 peak levels of $58.33 psf. Factors that Dampen and Magnify Rollover Risk The sky isn’t about to fall for office properties around the nation. “Not every single lease will roll over, so most properties will have some breathing room as existing leases continue to provide stable income,” notes Dan Quan, head of quality control at Reis. “After all, we muddled through 2011, when five-year leases signed at relatively high 2006 levels had to be renewed.” Still, some properties that have large tenants will find it challenging to renew leases at rent levels signed prior to the downturn. A recent Wall Street Journal article profiled specific buildings that are facing an uphill battle when it comes to keeping tenants at rent and occupancy levels at which they underwrote development plans three to four years ago.* If leverage was used to finance the purchase or development of particular properties, required fixed Source: Reis, Inc. payments will magnify the effect of income declines. Note how the sector also posted increases in occupied stock in Reis expects office fundamentals to continue recovering at a late 2010 and early 2011, only for absorption to turn negative measured pace throughout 2012. Unfortunately, that means that in the latter half of 2011. But signals were far more mixed then, improving rents and occupancies will not come soon enough with markets rattled by the EU debt crisis and rents still posting for 2007 leases to be renewed in an accretive fashion this year. declines. Now we are seeing vacancy declines not just for the Overall recovery patterns may not be derailed, but specific office neighborhood and community center subtype, but for various other buildings will have to face challenging times because of rollover retail property types as well. risk until the economy gets back on more solid footing. Vacancies are Falling Faster for Other Retail Subtypes Retail Properties Have Finally Begun to Recover Larger property types like power centers boast 6.8% vacancies, a Consider the robust leasing patterns for neighborhood and level that is fairly tight and that has declined consistently since mid- community centers in the fourth quarter of 2011 and early 2012. 2010. “Class A” malls, defined as regional malls that can command Occupied stock increased by roughly a million SF per month, rents in the upper 75th percentile or higher of their specific metro, topping out at 1.36 million SF in December and 1.87 million SF have vacancies of 6.4%, implying a slight but steady decline from in January. The sector has not absorbed this much space on a its cyclical peak of 6.9% from mid-2009. REIT-controlled malls monthly basis since 2007. posted occupancy improvements through 2011. Grocery-anchored neighborhood and community shopping centers are also doing Strong leasing patterns also pushed vacancies down by 10 basis relatively better than properties anchored by other tenant types, points. Vacancies declined slightly to 10.9% in January 2012, with end-2011 vacancies at 7.5% versus the overall average of 11%. unmooring itself from the 20-year high of 11.0% at which it was CRE Finance World Summer 2012 12


CRE Finance World, Summer 2012
To see the actual publication please follow the link above