Risk Management

For Commercial Real Estate: Let’s Make a Deal

Economic problems lead to bargains in the office space and industrial space markets.
Stephen TaubJanuary 6, 2009

As the deteriorating economy spreads to the commercial real estate sector, there could be good news for companies that rent office or industrial space. It figures to become less costly in the near future.

In a new study, commercial real estate services and investment firm Grubb & Ellis predicts that the office vacancy rate will rise by 2 percentage points, to 16.5 percent at the end of 2009. As a result, it expects that concession packages extended to tenants will become more generous as the year progresses.

Inventories of subleased space will put even more downward pressure on asking rental rates for direct lease space, which are expected to decline in the range of 4 to 5 percent for both Class A and B space by year-end.

“Employment growth drives demand for office space and the labor market will be shrinking in 2009,” said Robert Bach, senior vice president, chief economist of Grubb & Ellis.

The Washington, D.C., market figures to hold up best among the 60 office, 53 retail, 56 apartment, and 55 industrial markets that Grubb & Ellis annually measures, using 13 to 17 criteria important to the performance of real estate investments. The rest of the “top 10” markets — provide the least chances for deals for prospective renters — are Portland, Ore.; Los Angeles and San Francisco; Austin, Texas; Dallas-Fort Worth; Houston; Raleigh-Durham; Boston; and Oakland, Calif.

Companies looking to rent industrial space can also expect to find some good deals. Supply is expected to outpace demand in the industrial market, according to the study. As a result, the vacancy rate is expected to rise to 9.4 percent by the end of the year.

“The industrial market will recover more quickly than the office market because the construction pipeline is set to thin out sooner,” said Bach. Translation: Deals may not be as good for industrial-space renters.

Of course, companies with long-term leases that are shrinking, and that want to sublease their suddenly cavernous office space, also will have to settle for lower rates than they would have gotten last year. Same goes for companies that own their buildings.