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Monday, September 14, 2009

D.C.: "The commercial version of the subprime situation"

by Calculated Risk on 9/14/2009 10:53:00 AM

From the WaPo: Region's Office Space Vacancies Soaring

... property managers for the 1.4 million-square-foot [Constitution Center in Southwest Washington], which is scheduled to be completed in November, have yet to land any tenants ... Constitution Center is just one of several dozen existing, newly constructed or soon-to-be-completed office buildings in the Washington region that had vacancy rates in the 80 to 100 percent range as of midyear.

... In June ... the amount of vacant space in the region soared nearly 24 percent, to 47 million square feet from 38 million during the same month a year earlier.
Throughout the region, gleaming new office towers have sprouted, but with few or no tenants: a 275,000-square-foot building at 55 M Street SE in the emerging Capitol Riverfront area of the District; the 230,700-square-foot Piedmont Pointe II and 208,000 Redlands projects in Montgomery County; and the 215,000-square-foot Parkridge Center 6 and 178,000-square-foot Dulles View North in Fairfax County. Many other projects have been put on hold.
With many commercial real estate loans coming due soon, some foresee trouble for the region's properties. "We may see the commercial version of the subprime situation," said Steve Silverman, director of the Montgomery County Department of Economic Development.
This is happening all across the country: falling demand and still more office supply coming available as large commercial real estate projects are completed. This means falling rents and property values. And as the construction loans come due, there will be more and more losses for lenders.

And investment in non-residential structures will probably be a drag on GDP (and construction employment) at least through 2010 as projects are completed.

The only good news for the economy is that CRE is a trailing sector (See Business Cycle: Temporal Order).