Commercial Vacancies, the Next Real Estate Bubble to Burst

By
Real Estate Agent
News headlines throughout major U.S. cities note record-high commercial vacancies, along with a decrease in the asking price for commercial rental space. As was predicted by several major real estate statisticians earlier this year, the next real estate bubble to burst is commercial properties.

Based on statistics compiled by Cushman & Wakefield (C&W), the commercial vacancy rate hasn't been this high since mid-2005. C&W, a global commercial real estate brokerage and consulting firm, found that vacancy rates increased in 24 of the 32 major markets they surveyed.

Colliers International, a global commercial real estate service provider, noted that rental office space is becoming abundantly available. Nationally, office space vacancies in major business districts jumped from 12.5 to 13.74 percent in the second quarter of 2009. Suburban markets increased 1.95 percent to 16.28 percent. In addition, the firm found that the asking rent in major districts dropped by 3.2 percent during the quarter to an average of $38.25 per square foot. Average asking rent in U.S. cities overall, however, are now more often priced at around $25.00 per square foot.

Both firms note that the market has been pummeled by increased supply and a decline in demand due to the economic downturn. Executive Managing Director Maria Sicola asserted that elevated unemployment numbers translate into the reduced demand reflected in higher vacancy rates. More than 66% of 6.5 million square feet of newly constructed commercial space was still vacant at the end of the second quarter of 2009.

Michael Cohen, a research strategist for Property & Portfolio Research (PPR), stated that the firm's expectation was that vacancies would reach historic highs in office, apartment and warehouse space in 2009. According to ING Clarion Real Estate Managing Director David Lynn, the hospitality market has been dealt the biggest blow with major cutbacks in business and leisure travel.

Most cities across the nation are experiencing a rise in commercial vacancies. Phoenix has a 17.4 percent vacancy, Chicago's is at 15.4 percent, Washington, D.C. holds an 11.7 percent rate, Las Vegas exceeds 20 percent, Kansas City is higher than 18 percent, Providence, Rhode Island is now over 30 percent, and so on.

Along with the rise in commercial vacancies, insurance companies are becoming more concerned about liability associated with vacant real estate. Vacancies present additional risks not applicable to occupied real estate. Commercial insurance companies are encouraging owners of vacant real estate to minimize risk by implementing the following:

* Notify insurance company of vacancy, become informed and follow policy terms that apply to vacant property.
* Advise local authorities that property is vacant.
* Remove all combustibles, debris and any unnecessary materials from vacant property.
* Inform local fire department of materials left that could impair fire-fighting.
* Inspect property weekly, have someone watch the property or hire a guard service to daily drive by to observe property.

With real estate vacancy numbers not anticipated to see daylight for some time to come, this is wise advice, indeed.

Ki moved to Austin to attend college, and stayed to work in Austin real estate. He created a website encouraging buyers to search for Austin homes for sale. His site also has information on Austin Commercial real estate and general information and statistics on Austin real estate.
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Comments 15 New Comment

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Ambassador
2,342,163
Lenn Harley
Real Estate Broker - Virginia & Maryland
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate

Ki. This is very interesting information.  Why am I continuing to hear the "experts" on the business channels recommending that we invest in commercial real estate and REITS????

Folks need to pay attention to these numbers because, depending on the influence of the commerical real estate lobby, this may be where the government decides to dump a few hundred $Billion. 

WAIT!  The government didn't intervene with CIT, they are not likely to do much abut the commerical defaults, unless there are large banks with money invested in large commercial projects. 

 

August 14, 2009 05:04 AM
Rainmaker
972,936
Michael J. Perry
Lancaster Relo Specialist
RE/MAX Associates of Lancaster, PA.

I'm not sure what will happen to all of the commerical paper out there when a number of investors start defaulting due to impossible cashflow requirements !!!

August 14, 2009 07:32 AM
Ambassador
409,035
Joe Pryor
REALTORĀ® - Oklahoma Investment Properties
The Virtual Real Estate Team

As a short sale specialist, and having done CCIM I am waiting for commercial short sales. Stefan Swanepoel has committed that short sales will be done in commercial. As good as the economy is in Oklahoma City, retail is down everywhere, and strip centers that were financed two years ago and then built are remaining vacant. If I was investing in commcercial which has a different market cycle than residential, I would look to shorts.

August 14, 2009 07:38 AM
Rainer
26,747
Louis Esbin
Law Offices of Louis J. Esbin

NEGOTIATE NONDISTURBANCE COVENANTS IN LEASES.

In negotiating commercial leases for clients, I have been requiring that the owner/lessor provide a "Nondisturbance Covenant" that requires the owner/lessor to provide the lessee with an Estoppel Certificate that they are not in default with their lender/servicer.  In the event of default, we require all rent to be deposited in a segregated account until the default is cured or otherwise instructed by a court order to disburse funds.  Needless to say the owner/lessor is not happy with the provision, but in these days the lessee needs to be protected and their ability to retain their rights and remedies against a defaulting owner/lessor preserved.  The same advice is given for residential lessee's.

August 14, 2009 08:36 AM
Ambassador
706,016
Mike Frazier
Dyersburg Tn Real Estate
Carousel Realty of Dyer County

Ki,

We really have not seen this in our city yet and hopefully will not.

August 14, 2009 09:53 AM
Rainmaker
249,532
David Monsour
ABR - www.realty-insights.com
Coldwell Banker Select Professionals

Very Interesting to see some numbers attached to what we've all been reading.  I think Inman News was reporting about this a while back (not figures, but the bursting of the commercial bubble)

Commercial short sales could be interesting.  Save your pennies eh?

August 14, 2009 11:35 AM
Rainmaker
146,982
Carol Pease
CRS, Broker-Associate 512-721-6320
Pacesetter Properties

Very interesting but not surprising since many of these projects were years in the making and building.   No one could have predicted this deep recession and how it would impact commercial listings.

August 14, 2009 11:53 AM
Rainmaker
351,438
Damon Gettier
Broker/Owner ABRM, GRI, CDPE
Damon Gettier & Associates, REALTORS- Roanoke Va Short Sale Expert

I am not opposed to a "correction" in the commercial area. I think commercial rent has been a little out of control lately. 

August 14, 2009 06:39 PM
Rainmaker
101,562
Robert T. Boyer
San Diego Real Estate & Mortgage Loans, Ph.D. | VA Home Loan
FHA Loan, VA Loan, Jumbo Loan,FHA Loans,VA Loans,Jumbo Loans

As a facts and figures (and analogy) guy, thank you for putting a face with the name.

Louis, thank you for the great advice.

August 15, 2009 01:15 AM
Ambassador
1,227,260
Erica Ramus
MRE, Schuylkill County PA Real Estate
Erica Ramus - Ramus Realty Group - Pottsville, PA

We have many downtown storefronts vacant for a long time now, and the malls around here are around 30% VACANT.

August 15, 2009 07:51 AM
Rainer
71,363
The Ross Team Fort Collins Real Estate
CDPE
Prudential Rocky Mountain REALTORS

Very excellent information.  I do not think we have seen the worst yet in commercial :-(

August 24, 2009 02:16 PM
Rainmaker
710,772
Will Nesbitt
Nesbitt Realty is a family-run brokerage.
Nesbitt Realty at Condo Alexandria

This is a little scary to be honest.

September 01, 2009 10:57 AM
Anonymous #13
Anonymous
Anonymous

Where are the 'green' buildings and 'green' rentals in all of this?

Are they renting or selling faster than the existing 'nongreen'?

In the last year I have run into three firms striving to 'green' existing commercial properties as the talk is that there alot more to do (money to be made) on existing properties than there are new ones coming on board.

Any thoughts on how this will turn the Commercial real estate market around in the next few years?

 

October 15, 2009 02:36 PM
Rainmaker
242,188
David Jirasek
ALC, CCIM
Jirasek Realty

Our commercial market saw an increase in vacancies last year, including space at the new shopping centers, some bigbox, and a little restaurant space. Rental rates a little soft. Industrial is mostly owner occupied so a bit more stable. Our area is not seeing any short sales. Local banks still lending with good credit and down payment, but not on start up restaurants. Little to no "green" activity or interest.

January 10, 2010 07:47 AM
Rainer
6,474
Carla Williams

I'm a Realtor and working on a commercial lease and have been trying to find out the leased rates for other commercial properties in the same area. Where is this info avail?

August 20, 2010 03:03 PM
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Rainmaker
174,490

Ki Gray

Austin Real Estate
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