Sarasota County Office Vacancy Report (1/1/09)

The Sarasota EDC numbers are in and they are as follows:

Downtown: 10.69%
University Parkway Area (includes Lakewood Ranch): 19.24%
I-75 Fruitville S to Clark: 21.32%
Venice: 22.03%
North Port: 35.13% (!!)
Suburban & South Trail: 27.06%

Area Average: 17.97%

CLICK HERE for a copy of the report (200KB PDF)

Reuters: Values of Institutionally-Bought Commercial Property Post Decline

Note that this is for institutional investors only. Here we go:

By Ilaina Jonas

NEW YORK (Reuters) - U.S. commercial property prices by institutional investors posted their greatest quarterly fall in 22 years, according to an index developed by the Massachusetts Institute of Technology Center for Real Estate.

The transaction-based index, which MIT developed in 1984, fell 10.6 percent in the fourth quarter, surpassing the record fall of 9 percent seen in the fourth quarter 1987.

The index tracks the prices that institutions such as pension funds pay or receive when buying or selling commercial properties like shopping malls, apartment complexes and office towers.

"It now seems likely that this down market will be at least as severe as that of the early 1990s for commercial property," Professor David Geltner, director of research at the Center for Real Estate, said in a statement.

The index fell a record 15 percent in 2008, and easily surpassed the 9 percent decline seen in 1991 and the 10 percent drop in 1992.

That period marked one of the most severe recessions in commercial real estate recession and was the result of the savings and loan debacle and U.S. tax code changes in 1986.

The current downturn in commercial property is the result of the credit crisis, which has cut off debt financing for sales. The U.S. recession has also dealt a blow to commercial real estate returns, as business tenants cut staff and office needs, cut hotel demand, or close stores.

The index declined a total of 27 percent from 1987 through 1992, with most of the decline occurring in 1991 and 1992.

The index's performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.

The MIT Center for Real Estate also compiles indexes that gauge movements on the demand side and the supply side of the market that it tracks.

The demand-side index, which tracks prices potential buyers are willing to pay, has fallen for the past six quarters, and is down 23 percent for the year and 31 percent since its mid-2007 peak.

LINK

Demand For Industrial Virtually Non-Existent

From CoStar this morning. We're seeing a dramatic slowdown in interest across all types of property, industrial in particular is one of them. There's a lot of nice space out there that is cheaper than anything I've ever seen and a lot of it is sitting there. I'm talking about lease rates specifically, some of which are dirt cheap right now. Doesn't seem like there is going to be any relief in this sector, at least for the first two quarters of the year. Direct link to article below.

Demand for Industrial Space Enters the Red Zone

CoStar’s First State of the Industrial Market Review and Outlook Finds Weakness in Virtually Every Metric with Conditions

By Randyl Drummer
February 4, 2009

A wide array of economic factors that typically boost commercial real estate growth have gone south over the last 18 months, creating a "perfect storm" scenario for industrial property fundamentals, noted Jay Spivey, senior director of analytics for CoStar Group Inc. Spivey projects demand for industrial real estate in 2009 will likely reach its lowest ebb since the last recession in 2001-02, caught in an economic maelstrom of shrinking U.S. manufacturing and consumer spending, retail store closures and diminishing global appetite for U.S. products

Spivey's findings were presented in CoStar's first-ever 2009 State of the Industrial Market review and outlook, webcast to CoStar clients across the country from the company’s Bethesda, MD, headquarters.

"Economic growth is negative. The stock market is in a free fall. The credit markets are frozen. No one wants to invest because they are scared," said Spivey. "We’re not seeing huge negative absorption yet, but given the state of the economy, we can expect things to get worse before they get better."

Spivey pointed to a now-familiar list of economic stats and facts that bode ill for commercial real estate in 2009. The S&P 500 is down 40% and initial public offerings that fund new companies and business growth have dried up. Corporate borrowing has evaporated and the commercial mortgage-backed securities (CMBS) market is shut down. The "fear index" measuring investor sentiment and market volatility has spiked to an all-time high. And most significantly, job losses this year are expected to exceed the previous downturn eight years ago, when a combination of overbuilding and the collapse of Internet-based companies, among others, caused vacancies and negative absorption to soar.

Following are highlights of CoStar’s comprehensive industrial review and outlook. To add a human dimension to the cold numbers, CoStar invited industrial brokers and other CRE professionals to offer their own analysis and anecdotes on the market just over a month into 2009. One respondent summed up sentiment this way: "It will be a tough year, but not a bloodbath."

CRE Price Bubble

Office, flex and industrial assets are following basically the same pattern as the housing run up and bubble that burst in mid-2006. Overlaying prices for flex and industrial space onto the 10-city Composite of the S&P/Case-Shiller Home Prices Index, Spivey demonstrated a similar escalation and impending collapse of commercial prices.

Virtually every factor in the larger economy affecting demand for warehouse and distribution, flex and general industrial space is pointing downward. The U.S lost 2.6 million jobs in 2008, including large losses in the manufacturing, retail and wholesale trade sectors that drive industrial demand -- 44% more than were lost in 2002 following the dot-com bust. Economy.com predicts the country could lose as many as 3.1 million jobs this year and see a national unemployment rate as high as 9.2%.

Many of those losses are in manufacturing, retail and wholesale sales, construction and other sectors that fill warehouses and factory buildings. Recently released government figures show that real GDP, which correlates closely with demand for industrial space, fell at a 3.8% annualized rate in the fourth quarter -- the steepest decline since 1982. Most economists think the first quarter will be even worse.

U.S. freight carriers that keep the supply chain moving are reporting record declines in traffic in recent months. Imports and exports, an accurate barometer of industrial space demand, are down 23% and 19%, respectively, since July.

The weak dollar helped the U.S. industrial market over the last few years by bolstering export activity as U.S. goods became cheaper around the world. But the dollar gained strength toward the end of the year, dealing another blow to already reeling U.S. manufacturers by making their goods more expensive overseas.

"While the consumer has been in retreat for the past several quarters, the export sector -- which up until recently had been a bright spot -- is now experiencing the downward trajectory that's been felt for quite some time in other areas of the economy," said Ross Moore, executive vice president and director of market and economic research at Colliers International. "That said, the promise of a significant uptick in infrastructure spending, as mandated by the Obama Administration, could provide a much-needed jolt for the warehouse market."

The Industrial Production Index, which measures real output of manufacturing, mining and utilities companies, is even more closely correlated with industrial demand than GDP, Spivey said. The index has increased steadily for more than 20 years, with the exception of the 2001-02 period and the current downturn. Since 2007, the index has dropped 8.8 points.

Dave Burback, executive vice president and national director of Grubb & Ellis’ industrial practice, found some room for optimism in his assessment. Businesses consider industrial space an integral part of their supply-chain strategy, and their constant quest for cost-savings and efficiency should prop up demand this year despite the weak economy, he said. Burback acknowledged that nationally, supply is still expected to outpace demand with absorption continuing to flow into the red and vacancies rising as much as 60 basis points as the construction pipeline empties out.

New Industrial Supply Under Control

If there’s some good news, it’s that the supply of new buildings appears to be reasonably in harmony with demand, Spivey said. Over the last seven years, the amount of new space has exceeded the 50-year average only once, by a scant 14 million square feet in 2006. Space under construction has fallen every quarter since third-quarter 2007.

By comparison, between 1984 and 1990, the amount of new space delivered was above the average every year for a total of 479 million square feet, or 4% of total inventory. In the last building boom from 1996-2001, the excess totaled 461 million square feet, also 4% of industrial stock.

"It is probably a stretch to even call the most recent cycle overbuilding," Spivey said. "As the market started turning the last couple of years, it really reacted quickly and decisively. The market was very disciplined in this latest cycle, which should bode well as the market starts to improve."

The amount of excess supply in local markets varies. For instance, the Inland Empire market in Southern California delivered 23.9 million square feet more than it absorbed last year. Los Angeles, South Florida, Chicago and Dallas/Fort Worth also posted more than 10 million square feet of excess space.

Nationwide, construction of 1,173 properties totaling 74 million square feet of space, only 0.3% of the industrial inventory, is under way. However, only 16% of that coming space is leased, and the new properties coming on line could face serious trouble.

Though relatively modest by historical standards, the emptying of the construction pipeline is likely to drive up industrial vacancy rates, which declined steadily from 2004 to 2007 but rose by an average of 20 basis points per quarter during 2008. The national rate ended the year at 8.9%, the highest since 2004, and seems poised to shoot past the decade high of 9.5% in 2003.

"The consensus is that the troubles which have plagued the second half of 2008 will persist, and possibly worsen into 2009," Burback said. "Consumers have significantly pulled back spending and the reverberations are filtering down all the way to the industrial market as retailers cut their orders for merchandise that once filled warehouse distribution centers to capacity."

Total available space, either vacant, offered for sublease or expected by its owner to become vacant -- has swollen from 1.4 billion to 2.3 billion feet over the last two years. According to Burback, one of the big stories is the growing gulf between the direct vacancy rate and the availability rate. Sublease space is usually offered at a discount to direct space, tending to depress overall asking rates.

Absorption Goes Negative

While the national office market has not yet experienced negative absorption, industrial leasing started to turn negative in 2008 for the first time since mid-2002 and appears likely to exceed the last recession. Tenants gave back a modest 6 million square feet of space in the fourth quarter, compared with the decade peak of positive 63 million square feet absorbed in third-quarter 2006.

That said, leasing would be one of the relatively safe job descriptions in the next few quarters, Spivey said. "Even in a downturn, companies need space and will have lease renewals. I am sure there will be a lot of companies this year looking to find space to lease that is cheaper than what they are currently paying."

Job losses will be a big negative for industrial absorption this year. But fortunately, deliveries of new supply will be down 40% in 2009 and even more next year. Combining the job growth projections with the new delivery projections, CoStar projects that the vacancy rate will rise from its current 8.9% to 11% over the next two years. In turn, rents will likely drop 15% over the next few years -- even worse than the 9% decline during the dot-com downturn.

Slumping Investment Sales

Researchers added 18,000 industrial sales to the CoStar COMPs database last year, down from 22,000 in 2007. Both portfolio and overall sales dropped in 2008 and volume is at its lowest level since 2003. For-sale properties are sitting on the market almost 100 days longer now than in 2007, Spivey said.

Like the office and residential markets, industrial prices spiked to historic highs before starting to fall last year. Fueled by compressed cap rates, dollar sales volume shot up 300% earlier in the decade, only to fall 67% in 2008.

"Investment sales brokers have killed it the last five to seven years," pointed out Christopher J. Skibinski, managing director of industrial/supply chain & logistics solutions for Jones Lang LaSalle’s Charlotte, NC office. "This year will not be good for them. However, not every market experienced the same build up of inventory and growth like the Inland Empire (CA) and the investment sales markets. So relatively speaking, it will be a down year across the board, but not catastrophic."

Uncertainty in cap rates will continue to undermine sales prices. In the San Diego market, for example, prices and number of transactions went up together almost at the same exact rate during the boom market. Conversely, price declines will almost certainly result in further drops in volume.

One consolation is that fewer industrial loans appear to be in trouble. Between 77% and 80% of loans in special servicing or in danger of defaulting are for multifamily, retail and office properties, while only 4% are for industrial.

Tales From the Trenches

CoStar asked more than 100 brokers whether the outlook for the industrial market in 2009 is the worst they’ve ever seen. Though answers varied based on the respondent’s market, most see rays of hope through all the bad news.

"As bad as it appears to be, the recession of 1990/1991 seemed to be worse," said JLL’s Skibinski. "The difference today is that there is more information being reported to the market via negative news, so you have a negative information loop which seems to then drive sentiment deeper and quicker. The pace of change this time has been much more severe but I also believe that the recovery will occur quicker as a result of better information flow."

"While the recession has created a lot of financial headaches for most of the companies and landlords, it has also created a lot of opportunities in the market," said Dan Dokovic industrial sales and leasing broker with Sansone Group in St. Louis, MO. "For example, lower rents and property prices have enticed numerous companies to get into the market and take advantages of these conditions. While transaction value will most likely not be up in the next year, I believe that the volume will pick up and partially make up the difference. Also the limited supply of new buildings in the market will stabilize the market despite the current turmoil."

"Every day seems to be getting worse," reported Jack Haley, principal with Lee & Associates -- Orange, Inc. in Orange County, CA. "Since Jan. 1, I have been talking to all my largest clients about how to weather the storm in their industries. I am engaged as a consultant with many of them, re-negotiating their leases with the landlords, trying to find a way to reduce rents for the next 12 to 24 months. Landlords have been pretty receptive. Who wants another vacant building right now?"

"I do not think 2009, especially with the credit market crazies, will be a great year," says Michael J. Stich of Houston-based National Realty Group, Inc. "But it certainly will not be the worst industrial market year ever in Houston. 2009 will not be the year to acquire or even determine upside returns until the national economic turbulence has been settled."

"Quite possibly, 2009 will see the greatest market correction ever. That being said, brokers will have to work three times as hard as they used to," said Tom Dunsmore, senior associate of industrial sales and leasing with the Minneapolis/St. Paul office of Colliers Turley Martin Tucker.

LINK

Circuit City ripples go beyond vacancies, layoffs

Very good dissertation on the ripple effect Circuit City closings will have throughout the nation. The article is actually incorrect...the company, DJM, who is handling the subletting of the existing Circuit City sites claims over 27-million square feet of "project" encompassing over 600 locations. Click here for info on that.

Link below for the entire article. From MSNBC.

Circuit City ripples go beyond vacancies, layoffs
Pain to be felt by mall owners, suppliers, local businesses, even newspapers
The Associated Press
updated 4:57 p.m. ET, Wed., Feb. 4, 2009

Circuit City will finally flicker out when its last 567 stores close this year, but the bankruptcy of the nation's second-largest electronics retailer will ripple across the U.S. economy for years.

In its wake will be 18.71 million square feet of vacant space in a faltering real estate market. More than 40,000 workers will be jobless, including 7,000 laid off last year.

Shopping centers will lose rental income. Suppliers will lose display space. Newspapers already struggling with falling ad revenues will have one less glossy insert in their Sunday editions.

Circuit City is bigger than any other retailer that has gone under in the current recession. The job outlook for its workers is worse. The prospects for suppliers finding other customers is grim, and a larger pool of creditors are likely to go unpaid.

"The situation today is so different than" during other downturns, said Jerry Mozian, a restructuring expert at Tatum LLC. "It wasn't the whole economy. Here, we've got a worldwide recession."

Other big retail bankruptcies, like Macy's in 1992 and Kmart's in 2002, ended in reorganizations or buyouts rather than liquidation.

Circuit City initially hoped to reorganize when it filed for Chapter 11 protection in November. It was sagging under the weight of $2.32 billion in debt and dismal sales as consumers cut back. But the 60-year-old company couldn't work out a sale or secure new financing, and on Jan. 16 announced it would close for good.

The chain owes nearly $625 million to its 30 largest unsecured creditors — mostly vendors who supply the DVDs, flat-screen TVs and headphones on Circuit City shelves. They must wait to be paid until secured creditors such as bank lenders are satisfied.

That's hitting electronics makers when they can least afford it. Hewlett-Packard, which is shedding 8 percent of its work force after a big acquisition, is owed nearly $120 million. Samsung, which posted its first ever quarterly loss Friday, is owed roughly $115 million. And Sony, which saw its net profit fall 95 percent in the October to December quarter, is owed $60 million.

Smaller businesses also got burned. Freelance photographer Scott Brown had worked for Circuit City's corporate office in Richmond, Va., for two years, shooting photos of people and products for the company's advertisements. The account grew to represent a quarter of his business.

The 41-year-old delivered his last project just four days before the company filed for Chapter 11. At the time, Circuit City owed him nearly $30,000. Brown listed himself as a creditor with the courts and hired an attorney. But the lawyer advised him he would probably never get paid.

"It was huge," Brown said of the loss. "It added to the stress of the daily business like you wouldn't believe."

The vacant stores leave a huge hole for shopping center owners to plug. The 18.71 million square feet of space is like the Raymond James Stadium in Tampa, Fla., where the Super Bowl was played — multiplied by 11.

Finding new tenants is increasingly difficult, as chains like Linens 'N Things, Mervyns and Steve & Barry's also go out of business. Other companies such as Starbucks and Ann Taylor are retrenching from an era of swift expansion.

Making matters more difficult is the size of most Circuit City stores, which range from nearly 17,000 square feet in Steubenville, Ohio, to more than 66,000 square feet in El Paso, Texas. Very few retail tenants require such large spaces, said Green Street Advisors analyst Nick Vedder.

"The anchors are really one of the most important pieces of the center," Vedder said. "They bring in the traffic, they are the lifeblood that (other) tenants rely on to bring customers to the stores."

Read rest of the story...