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VOL. 125 | NO. 33 | Thursday, February 18, 2010

Questions Abound for Commercial Real Estate’s Future

By Eric Smith

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Participants in the 2010 Commercial Property Forecast Summit network in the lobby of the Germantown Performing Arts Centre on Wednesday. The program was presented by the Memphis Area Association of Realtors Commercial Council. Photo: Lance Murphey

The commercial real estate market will need to navigate its way through a host of landmines before it sees anything resembling recovery.

That was the message Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University, told local brokers, bankers and appraisers at Wednesday’s Commercial Property Forecast Summit, held at the Germantown Performing Arts Centre and sponsored by the Memphis Area Association of Realtors Commercial Council.

Comparing the commercial market to a military vehicle on a perilous route through enemy territory, Dotzour said everything from policy decisions made in Washington to ongoing credit issues to budget crunches at all levels of government could derail a real estate rebound.

Dotzour, a renowned expert in how global and national trends impact residential and commercial real estate, spent an hour detailing the travails of the commercial market during the past two years and the pitfalls that remain before the market gets back on track.

He said every investor and business decision-maker wants to know if their buildings are going to fill up and what’s going to happen to their values. Unfortunately, the answers aren’t as clear as the questions, and the overall economy, especially unemployment, will be the deciding factor.

At the same time, Dotzour remains confident the American spirit of entrepreneurialism will prevail, noting corporate profits, manufacturing orders and consumption all enjoyed increases to close 2009.

Dotzour projected a period of recovery in 2011 and 2012 if the U.S. doesn’t repeat the missteps of Great Depression-era America or 1990s-2000s Japan, both of which saw problems worsen over time.

Keynote speaker Dr. Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University, speaks about the outlook for commercial real estate at the 2010 Commercial Property Forecast Summit held at the Germantown Performing Arts Centre on Wednesday. Photo: Lance Murphey

A captive audience on hand for the seventh annual forecast summit, emceed and chaired by Nick Clark, then heard local experts discuss the Memphis market.

Ron Riley of In-Rel Management Inc. gave the office overview. Memphis’ office sector in 2009 notched a negative absorption rate of 169,861 square feet as vacancy rose to 18.3 percent market-wide, the highest since 1990.

One factor taking a huge toll on the office market, Riley said, was the rise of “shadow space,” the square footage that is not being used but also not being marketed, typically because a company vacated only part of its entire leased space.

For the office market to stabilize, Memphis will need to see about 1.3 million square feet of absorption during the next year or so, coupled with no new construction.

The industrial sector also has challenges, said Andy Cates of Colliers Wilkinson Snowden. What is usually Memphis’ bread and butter saw absorption plummet and vacancy rise during 2009, the result of a few large tenants such as Hewlett-Packard and SunTrust Banks shedding space.

Memphis is well below the national average – and even that of its peer cities – in terms of average lease rates but also in terms of vacancy rates. The vacancy rate for Memphis’ industrial space, about 195 million square feet total, ended 2009 at 14.5 percent, the highest rate since 2004.

One bright spot for Memphis was companies expanding their presence in the area or setting up shop here for the first time. The city’s transportation assets, highlighted by railroads’ investments, keep the outlook positive for the industrial sector barring any new construction.

Scott Barton of CB Richard Ellis discussed Memphis’ retail market, which has seen lease rates sink to $10.70 per foot while vacancy sits at 12.6 percent. Although the market appears at or near the bottom, plenty of questions remain as to when recovery will begin.

The city’s biggest problem is that it is “over-retailed,” Barton said, meaning Memphians have too much retail space per capita. The national average is 23 square feet of retail per person, while in Memphis the average is 35 square feet.

For the retail market to rebound, there needs to be no new construction and landlords willing to offer lower rent to improve cash flow.

The multifamily sector has been plagued by real-estate owned (REO) and distressed sales, which accounted for more than half of all arms-length transactions in 2009, said Blake Pera of CBRE. Also, last year’s total sales were just $59.7 million, down 41 percent from $94.7 million in 2008, as owners who didn’t need to sell didn’t list their properties.

REO and distressed sales will continue to dominate the market in 2010 and beyond, Pera said, although stabilized properties should come back to the market by summer. The good news is that construction will be down in 2010, meaning that absorption should rise while occupancy (89.3 percent) and rental rates will remain the same.

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 78 307 21,073
MORTGAGES 82 330 24,691
FORECLOSURE NOTICES 66 93 8,703
BUILDING PERMITS 0 837 43,174
BANKRUPTCIES 63 240 14,142
BUSINESS LICENSES 17 75 6,476
UTILITY CONNECTIONS 25 139 13,650
MARRIAGE LICENSES 10 77 5,146

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