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Massive Job Losses Likely To Push Commercial Vacancies To Record Highs

As jobs continue to evaporate at a rapid pace, tenants for multifamily, office and industrial properties are also at risk of vanishing into thin air. Fundamentals in the hotel and retail sectors have already been badly hurt by the fall in consumer spending. With businesses across the nation now shedding more jobs, vacancy rates in the remaining sectors of commercial real estate will likely reach historic highs this year.

The employment figures reported by the federal government today continued to paint a picture of the worst job market in three decades. In January, the U.S. economy lost 598,000 jobs, pushing the unemployment rate to 7.6%, up from 7.2% in December and 4.9% in January 2008.

The loss represents the biggest monthly decline since December 1974, according to Michael Cohen, research strategist with Boston-based Property & Portfolio Research (PPR). With projected negative gross domestic product growth through the first three quarters of the year, the jobs situation is likely continue to deteriorate until 2010, when the unemployment rate will reach 9%, economists say. That means further pain for the commercial real estate industry.

“Our expectations are for vacancies to reach historic highs in three out of the four core property types: apartment, office and warehouse,” says Cohen.

The January report points to a loss of 205,000 jobs in the manufacturing sector; 121,000 jobs in the professional services sector; 45,000 jobs in the retail sector; 28,000 jobs in the hospitality sector; and 111,000 jobs in the construction sector.

So far, hospitality properties have suffered the brunt of the fallout, as both businesses and leisure travelers have cut back on travel expenses, says David Lynn, managing director in the New York office of ING Clarion Real Estate, an investment management firm.

Another sector that’s getting hit hard by the fall in consumer spending is retail. Economic retail vacancies will approach 18% by the end of 2009, just short of the 18.9% historic high recorded in 1992, according to PPR.

The office market will suffer as well, says Cohen. The firm projects that office vacancies will increase 300 basis points this year, reaching a peak of 20% by 2010. The exception to the overall weakness in the sector will be medical office buildings and government properties, according to Bob Bach, senior vice president and chief economist in the Chicago office of brokerage firm Grubb & Ellis. Education and health services added 54,000 jobs in January, while government added 6,000 jobs.

The industrial sector already reached its highest vacancy rate on record in the fourth quarter of 2008, at 11.3%, according to PPR. By the second quarter of 2010, that rate will reach up to 12.6%.

The good news is that industrial properties will likely be among the first to recover after the downturn, says Hessam Nadji, economist and managing director of research with the Encino, Calif.-based Marcus & Millichap Real Estate Investment Services.

Meanwhile, troubles in the multifamily sector continue to take the commercial real estate industry by surprise, says Cohen. In 2008, the prevailing wisdom dictated that as demand for condos and single-family homes declined, demand for rental units would rise.

But that was before job losses began to accelerate. With 3.6 million people losing their jobs since the recession began in December 2007, many would-be renters have been moving in with friends and family. As a result, multifamily vacancies reached 7% in 2008, according to PPR, and will move up another 130 basis point in 2009, to 8.3%.

The economic stimulus package currently making its way through Washington might help things along somewhat, but James Smith, chief economist with Parsec Financial Management, an Asheville, N.C.-based financial planning and wealth management firm, says the government would help the employment situation if it invested more money in infrastructure improvement projects.

According to the American Society of Civil Engineers, the U.S. infrastructure needs approximately $2.2 trillion in repairs over the next five years. “That would put millions of people back to work,” Smith says.

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