NEW YORK — The balance of power between landlords and tenants will shift dramatically in 2009.
For landlords, this promises to be a year of intense competition, more bankrupt tenants, and tightfisted lenders. For renters, it looks like a time of abundant choices and tiny — if any — price increases.
From apartments to shopping malls, office towers to dockyard industrial space, the commercial real estate market will be marked by rising vacancy rates and weak to no rent growth. And the chokehold on credit could push many property owners that need to refinance into foreclosure.
Nearly 40 percent of real estate investors need to refinance part of their portfolios this year, according to more than 1,100 investors surveyed in October by Marcus & Millichap Real Estate Investment Services and National Real Estate Investor magazine.
“It’s hard to be an optimist right now,” said Dan Fasulo, managing director of research firm Real Capital Analytics. “We’re at the point where there’s another potential systemic failure that the industry is trying to avoid.”
Real Capital identified more than 1,000 large commercial properties nationwide, representing $25.7 billion, that are already bank-owned or the landlord is in default. But there are another $80.9 billion, or more than 3,700, properties that could potentially fall into trouble this year, the firm estimates.
Last month, a commercial real estate trade group appealed to the Bush administration for a slice of the $700 billion bailout of the financial services industry. The Treasury Department has yet to make a decision whether to include commercial property loans.
If the government doesn’t come to the rescue, industry experts expect lenders to step up in aiding troubled property owners by offering maturity extensions or other workouts.
“Lenders don’t want to run malls,” said Victor Calanoog, research director at Reis Inc.
The crunch isn’t just affecting landlords that need to refinance. Acquisitions have all but disappeared following a bang-up 2007.
Fasulo said just 50 large office properties traded hands nationwide in the month of November, the lowest level since the early 1990s when the industry was in a severe recession.
Along with a drop in sales volume, experts expect more rents to drop this year. Top quality buildings in the best markets could lose another 10 to 15 percent this year, and moderate quality buildings in secondary markets could shed 15 to 20 percent, according Hessam Nadji, managing director at Marcus & Millichap.
Falling prices will only make it harder for landlords to refinance.
Owners with less than 30 percent equity in a property will have to pay higher interest rates — if they can get a loan at all.
Retail vacancy rates are forecast to climb to 11 percent this year, Nadji says, and rents will decline between 4 and 6 percent as property owners contend with more tenant bankruptcies, store closures and fewer retailer expansions. Already, failed retailers like Linens ‘n Things and Mervyns have left many shopping-mall owners with dark storefronts.
General Growth is the poster company of retail woes. Earlier in the decade, the company piled on debt to fund an aggressive acquisition program. Now, it’s on the hook and desperately needs to refinance to shore up its books.
Office properties won’t escape the recession unscathed either. Nadji expects office vacancies to rise to almost 18 percent by the end of the year, up from an estimated 15 percent at the end of 2008.
