NAIOP Survey Reveals Developers’ Outlook on Commercial Real Estate, October 30, 2008
Washington, D.C. – Sentiment about current
economic and business conditions is the lowest it’s been
since the U.S. economic downturn in 2001, according to the annual
“Vital Signs” survey conducted among commercial real
estate developers, owners and investors.
Respondents say that both the economy and market fundamentals have lost steam, with continued weakening and a long recovery time expected. Capital availability remains low, and the current lack of financing has jumped to be a paramount concern.
In its seventh year, the Vital Signs survey, conducted in early September by NAIOP and compiled by CB Richard Ellis Investors, brought together the unique assessments of 243 principal members and participants in NAIOP’s National Forums.
“The Vital Signs survey was conducted before the extreme events of the past month, and we know that this most recent financial downturn has created even more concern for those seeking capital,” said Thomas J. Bisacquino, NAIOP president. “While the overall consensus of this survey is somber, there’s hope that most indicators will at least stabilize in 2009.”
"NAIOP Forum members are feeling the pressure from rapid shifts in the economic and property market environment, as the Vital Signs Survey results show," said Doug Herzbrun, global head of research for CB Richard Ellis Investors, a subsidiary of CB Richard Ellis. "Within these generally subdued responses, there are important differences between regions and property types that provide us with valuable insights into the environment next year and beyond."
The Report Findings
The declining economy led concerns, with the uncertainty in the financial markets resulting in the erosion of consumer and business confidence, which affects economic growth in the short and medium term.
The economy has at best stalled. Few sense any growth in the economy, with respondents split nearly equally in classifying the economy as in a recession or as flat. Only 12 percent think that the economy will be in a recession in 2009; 66 percent believe it will be flat; and 22 percent predict growth.
The credit crisis has become a huge factor. Second to the economy, a lack of financing is perceived as the second greatest threat to the health of the nation’s industrial and office markets. Ninety-two percent of respondents said that borrowing was tougher in 2008 than in 2007; 30 percent said borrowing will be even more difficult in 2009. Recent aggressive moves by the Federal Reserve and central banks worldwide to jumpstart credit availability and lower interest rates could ease the credit crunch in 2009, but most respondents aren’t optimistic at this point.
Industrial markets weakened sharply in 2008, with limited optimism for 2009. Industrial rents were flat in 2008, and 29 percent saw drops in their local markets. This is consistent with the increase in industrial availability rates, from 10.2 percent at the end of 2007, to 11.4 percent in third quarter 2008. Stability is expected in 2009, with only 21 percent expecting that rents will deteriorate. New supply is expected to remain limited in 2009.
The economy/demand has surged as the greatest threat to the health of the industrial market, followed by the lack of financing and construction materials costs. It is expected that manufacturing will be negatively affected by the global economic slowdown, further weakening demand already hurt by weak U.S. imports.
The financial crisis has played a significant role in the office sector. Nearly one-third of the respondents saw their local market’s rents deteriorate in 2008, and 28 percent expect further declines in 2009. This is reflective of the increase in office vacancy rates from 12.6 percent at year-end 2007, to 14.1 percent in third quarter 2008. Most of the increase in vacancy rates has been in regions that have been decimated by the housing and construction sectors.
Geographically, markets heavily dependent on financial services (New York, Charlotte, Boston and San Francisco) were identified as the next to expect vacancy increases. The biggest concerns were from the Mountain states, where nearly half the respondents felt that rents will decline further, followed by the Pacific/California at 39 percent.
Economic and financing issues were still the primary concerns in the investment outlook. Overall acquisition activity is down by 60 percent compared to 2007, due to the lack of available credit in the market and investors’ concerns that prices haven’t hit bottom. According to Real Capital Analytics, overall cap rates are up between 100 to 200 basis points in 2008 and many market players anticipate further expansion.
Nearly all sectors lost their luster in 2008, but the shift was towards specialized products, including biotech/lifescience facilities and medical office.
Development potential saw large drops in 2008. The proportion of respondents positively viewing central business district office development declined from 28 percent to 9 percent, and suburban office declined from 33 percent to 4 percent. Warehouse/distribution took an equal fall from 43 percent to 15 percent. Mixed-use development potential fell from 42 percent to 12 percent. Only biotech and medical office development were relatively healthy at 21 percent and 32 percent respectively. This is indicative of the shortage of real estate product in health care and research, and that aging demographics are becoming a more paramount demand driver.
For further information from the survey or to learn more about NAIOP, visit www.naiop.org. Members of the media interested in receiving a complimentary copy should contact Kathryn Hamilton at (703) 904-7100, ext. 165, or hamilton@naiop.org.
# # # # #
About NAIOP: The National Association of Industrial and Office Properties is the nation's leading trade association for developers, owners, investors and asset managers in industrial, office and mixed-use commercial real estate. Founded in 1967, NAIOP comprises more than 18,000 members in 56 North American chapters and provides networking opportunities, educational programs, research on trends and innovations and strong legislative representation. For more information, visit www.naiop.org.
Respondents say that both the economy and market fundamentals have lost steam, with continued weakening and a long recovery time expected. Capital availability remains low, and the current lack of financing has jumped to be a paramount concern.
In its seventh year, the Vital Signs survey, conducted in early September by NAIOP and compiled by CB Richard Ellis Investors, brought together the unique assessments of 243 principal members and participants in NAIOP’s National Forums.
“The Vital Signs survey was conducted before the extreme events of the past month, and we know that this most recent financial downturn has created even more concern for those seeking capital,” said Thomas J. Bisacquino, NAIOP president. “While the overall consensus of this survey is somber, there’s hope that most indicators will at least stabilize in 2009.”
"NAIOP Forum members are feeling the pressure from rapid shifts in the economic and property market environment, as the Vital Signs Survey results show," said Doug Herzbrun, global head of research for CB Richard Ellis Investors, a subsidiary of CB Richard Ellis. "Within these generally subdued responses, there are important differences between regions and property types that provide us with valuable insights into the environment next year and beyond."
The Report Findings
The declining economy led concerns, with the uncertainty in the financial markets resulting in the erosion of consumer and business confidence, which affects economic growth in the short and medium term.
The economy has at best stalled. Few sense any growth in the economy, with respondents split nearly equally in classifying the economy as in a recession or as flat. Only 12 percent think that the economy will be in a recession in 2009; 66 percent believe it will be flat; and 22 percent predict growth.
The credit crisis has become a huge factor. Second to the economy, a lack of financing is perceived as the second greatest threat to the health of the nation’s industrial and office markets. Ninety-two percent of respondents said that borrowing was tougher in 2008 than in 2007; 30 percent said borrowing will be even more difficult in 2009. Recent aggressive moves by the Federal Reserve and central banks worldwide to jumpstart credit availability and lower interest rates could ease the credit crunch in 2009, but most respondents aren’t optimistic at this point.
Industrial markets weakened sharply in 2008, with limited optimism for 2009. Industrial rents were flat in 2008, and 29 percent saw drops in their local markets. This is consistent with the increase in industrial availability rates, from 10.2 percent at the end of 2007, to 11.4 percent in third quarter 2008. Stability is expected in 2009, with only 21 percent expecting that rents will deteriorate. New supply is expected to remain limited in 2009.
The economy/demand has surged as the greatest threat to the health of the industrial market, followed by the lack of financing and construction materials costs. It is expected that manufacturing will be negatively affected by the global economic slowdown, further weakening demand already hurt by weak U.S. imports.
The financial crisis has played a significant role in the office sector. Nearly one-third of the respondents saw their local market’s rents deteriorate in 2008, and 28 percent expect further declines in 2009. This is reflective of the increase in office vacancy rates from 12.6 percent at year-end 2007, to 14.1 percent in third quarter 2008. Most of the increase in vacancy rates has been in regions that have been decimated by the housing and construction sectors.
Geographically, markets heavily dependent on financial services (New York, Charlotte, Boston and San Francisco) were identified as the next to expect vacancy increases. The biggest concerns were from the Mountain states, where nearly half the respondents felt that rents will decline further, followed by the Pacific/California at 39 percent.
Economic and financing issues were still the primary concerns in the investment outlook. Overall acquisition activity is down by 60 percent compared to 2007, due to the lack of available credit in the market and investors’ concerns that prices haven’t hit bottom. According to Real Capital Analytics, overall cap rates are up between 100 to 200 basis points in 2008 and many market players anticipate further expansion.
Nearly all sectors lost their luster in 2008, but the shift was towards specialized products, including biotech/lifescience facilities and medical office.
Development potential saw large drops in 2008. The proportion of respondents positively viewing central business district office development declined from 28 percent to 9 percent, and suburban office declined from 33 percent to 4 percent. Warehouse/distribution took an equal fall from 43 percent to 15 percent. Mixed-use development potential fell from 42 percent to 12 percent. Only biotech and medical office development were relatively healthy at 21 percent and 32 percent respectively. This is indicative of the shortage of real estate product in health care and research, and that aging demographics are becoming a more paramount demand driver.
For further information from the survey or to learn more about NAIOP, visit www.naiop.org. Members of the media interested in receiving a complimentary copy should contact Kathryn Hamilton at (703) 904-7100, ext. 165, or hamilton@naiop.org.
# # # # #
About NAIOP: The National Association of Industrial and Office Properties is the nation's leading trade association for developers, owners, investors and asset managers in industrial, office and mixed-use commercial real estate. Founded in 1967, NAIOP comprises more than 18,000 members in 56 North American chapters and provides networking opportunities, educational programs, research on trends and innovations and strong legislative representation. For more information, visit www.naiop.org.