Commercial Real Estate Recovery Contingent On Job Growth

Commercial real estate values continue to fall, and demand for office space continues to decline as US unemployment rates continue to increase. Experts believe that until employment growth …

Commercial real estate values continue to fall, and demand for office space continues to decline as US unemployment rates continue to increase. Experts believe that until employment growth returns, a recovery in the commercial real estate market is still far away. See the following article from HousingWire for more on this.

Values of commercial real estate will continue to fall before a slight rebound and a gradual recovery, according to a new report from Moody’s Investor Service.

Commercial property values fell 42.9% from their peak in October 2007 and will remain stunted far longer than cash flows, according to the report. Analysts further predict that values will decline 45% to 55% from that peak in months ahead.

“We believe that valuations will rebound off the bottom and settle in for the longer term at levels 30%-40% below the market top as liquidity and investors return to the sector and property cash flows begin to recover,” said Nick Levidy, Moody’s managing director.

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Analysts at Moody’s see cash flows that back commercial mortgage-backed securities (CMBS) will recover slowly over the next several years. However, refinancing risk on CMBS will grow as maturities near on bonds issued during that 2007 peak.

Moody’s anticipates downgrades of up to three levels for many tranches of 2006 to 2008 vintage CMBS, but ratings on the most senior bonds should remain at current levels.

“Cash flows for properties with short-term lease structures, such as hotels and multifamily, will likely hit bottom in 2010 or early 2011,” said Levidy. “The bottom for office, retail and industrial properties will take longer to form.”

Specifically, demand in office buildings will continue to decline in anticipation of an increase in US unemployment into next year. Moody’s expects the market to reach bottom in 2011 when employment rates rise and tenants determine their need for space.

Analysts expect the vacancy rate for multifamily properties to peak within the next few months, and the rental rate growth will stall until 2011, hinging on unemployment like other markets.

Government programs to encourage home ownership, a recent decline in single family home prices and a large number of shadow rentals, which includes condominiums and single-family homes will harm the supply and demand cycle for multifamily housing, according to the report.

“Employment growth is fundamental, for example, to the office property market,” Levidy said. “The health of the residential housing market is a key for the multifamily sector and retail properties are greatly dependent on rising consumer confidence.”

This article has been republished from HousingWire. You can also view this article at
HousingWire, a mortgage and real estate news site.

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