by Calculated Risk on 9/11/2007 02:17:00 PM

From the Chicago Tribune: Empty offices leave landlords high and dry (hat tip Vader)

... Chicago-area office landlords are now feeling the pain as the problems spread into various channels of the commercial property industry.
...
Now, rather than anticipate big sales, commercial landlords are worrying about how to pay the debt on buildings that are generating less income than just a few months ago.

... As rents diminish and credit rating agencies lower the extravagant asset value assessments of recent years, an owner could be holding a building that is worth less than the amount owed on it.
...
"All across the country there are huge spaces where tenants aren't paying rent," [Joseph Cosenza, vice chairman of the Inland Real Estate Group] said. "In May, I was to sign a contract to buy a brand new office on the East Coast," he said. When the developer declined to give Cosenza the anchor tenant's financial statements, he walked away from the deal. "Thank God because today the tenant is gone."
...
Chicago, especially in the suburbs, has higher vacancies and lower rents than other U.S. office markets. As of midyear, the metropolitan area had an 18.5 percent vacancy rate, 532,678 square feet more put back on the market than was taken off by leasing and an overall asking rent of $22.16, still off from the high of $22.30 in 2000, according to Cushman & Wakefield of Illinois Inc.

Downtown Chicago, meanwhile, has 6 million square feet of new offices in development.

The commercial real estate (CRE) downturn will be worse in Chicago than many other areas - because of the already high vacancy rate - but it appears the expected slowdown in CRE has started.

As a reminder, in a typical business cycle, investment in non-residential structures follows investment in residential structures with a lag of about 5 quarters.

Click on graph for larger image.

This graph shows the YoY change in Residential Investment (shifted 5 quarters into the future) and investment in Non-residential Structures. In a typical cycle, non-residential investment follows residential investment, with a lag of about 5 quarters. Residential investment has fallen significantly for five straight quarters. So, if this cycle follows the typical pattern, non-residential investment will start declining later this year.