Outlook remains grim for commercial real estate

Expect another year of rising vacancies, declining property values and distressed sales in the local commercial real estate market.

That’s the message from Colliers Turley Martin Tucker in its annual State of Real Estate report. The firm will discuss its predictions for 2010 at an event Wednesday afternoon at The Murat.

CTMT forecasts more upheaval and pain for property owners in 2010 as tenants continue to look for savings on their real estate and consumers continue to pull back. New developments will be rare, as will investment sales of the non-distressed variety. Office and retail, which have the most ground to recover, likely will continue to lose tenants and see values erode.

Among the report’s findings:

– Office: Overall vacancy in the Indianapolis area rose to 20.6 percent at the end of 2009, up from 18 percent in 2008. Developers added only two significant buildings, Alderson Commercial Group’s 44,000-square-foot Signature Building on the south side and Edgeworth Laskey’s 110,000-square-foot Concourse at Crosspoint in Fishers.

Despite the small amount of new space hitting the market, the city lost a net of 418,000 square feet of occupied office space in 2009, leaving the market with about 6.6 million vacant square feet of office space.

In 2010, the value of office properties will continue to drop as demand for new office space remains "muted." Slow job growth and more strict underwriting standards likely will hamper any market resurgence, and a glut of available sublease space also will squeeze rents.

"Downward rent pressure has caused net rents to decline to levels below which some existing mortgage obligations can be met," CTMT reports. "Equity positions remain precarious as leveraged owners will encounter an inability to refinance.

– Retail: The market for retail real estate was just as dismal in 2009. Rent rates fell across the board, but neighborhood retail centers that rely on new-home construction fared worst.

"Nearly every segment of the retail market experienced rental rate erosion and in many instances declines in asking rates were substantial," CTMT reports. "As the year progressed, tenant flight to quality prompted many developers and owners to regroup and focus on adaptive reuse of their increasingly vacant properties."

Vacancy rates will continue to rise during the first half of 2010 but will began to stabilize by the end of the year, CTMT predicts. More stores will close, and retailers will downsize existing footprints.

Retail sales likely will drop even if the employment picture brightens, meaning landlords will have to offer concessions and rent reductions to remain competitive. New developments are unlikely, and relocations will continue to be the vast majority of market activity.

– Industrial: The industrial market was comparatively stable in 2009, as tenants took an additional 2.2 million square feet of space. Developers added 4.1 million square feet of space, and the vacancy rate stood at 7.4 percent at year-end.

Among the notable deals: Cooper Tire built an 807,000-square-foot distribution center in Franklin Tech Park; SMC Corporation of America opened its 625,000-square-foot headquarters in the Noblesville Corporate Campus; and Monarch Beverage built a 534,000-square-foot distribution facility in Lawrence.

In 2010, CTMT expects a lack of new industrial construction will keep inventory levels stable, but the market will face competition from excess inventory in neighboring markets including Chicago and Columbus, Ohio. Landlords will have to continue offering lower rates and incentives to renew leases.

– Investment: The investment market saw fewer deals at lower prices in 2009, as institutional investors pulled back and potential buyers sought bargain-basement deals. Land values took a plunge, and most speculative construction came to a standstill.

"Commercial real estate assets continued to be extremely illiquid at distressed prices," CTMT said.

In 2010, investment sales of multifamily properties will be the first to rebound since values didn’t fall as far thanks to government backstops. Distressed sales should rule the office investment market in 2010, as current owners are unable to refinance maturing debt.

Retail investment activity will continue to decline thanks to weak fundamentals, and the market probably won’t improve until 2012, CTMT predicts.

Cash will be king again in 2010. Nationwide, only $49 billion in deals closed in 2009, down from $151 billion in 2008 and $533 billion in 2007.