by Calculated Risk on 10/07/2009 01:11:00 AM

Click on graph for larger image in new window.

This graph shows the office vacancy rate starting 1991.

Reis is reporting the vacancy rate rose to 16.5% in Q3 from 15.9% in Q2. The peak following the previous recession was 17%.

From Bloomberg: U.S. Office Vacancies Reach Five-Year High of 16.5%, Reis Says

U.S. office vacancies ... climbed to 16.5 percent ... New York-based Reis said in a report. Effective rents ... fell 8.5 percent, the biggest year-over-year drop since 1995.

“The decline in effective rents really accelerated after the fall of Lehman Brothers,” Victor Calanog, director of research at Reis, said in a statement. “Tenants will continue shedding occupied space as jobs are lost.”
...
“Weakness in rents is not concentrated in just a few” cities, Calanog said.

Earlier this year Reis forecast that the U.S. office vacancy rate will top out at 18.2 percent in 2010, and that rents will continue to decline through 2011.

No wonder the Fed is so worried (previous post).

by Calculated Risk on 10/06/2009 10:07:00 PM

From the WSJ: Fed Frets About Commercial Real Estate

Banks in the U.S. "are slow" to take losses on their commercial real-estate loans being battered by slumping property values and rental payments, according to a Federal Reserve presentation to banking regulators last month.

.... "Banks will be slow to recognize the severity of the loss -- just as they were in residential," according to the Fed presentation, which was reviewed by The Wall Street Journal.

A Fed official confirmed the authenticity of the document, prepared by an Atlanta Fed real-estate expert who is part of the central bank's Rapid Response program to spread information about emerging problem areas to federal and state banking examiners throughout the U.S.

While the Sept. 29 presentation by K.C. Conway doesn't represent the central bank's formal opinion, worries about the banking industry's commercial real-estate exposure have been building inside the Fed for months. ...

Mr. Conway's presentation painted a bleak picture of the sliding real-estate values and enormous debt that will need to be refinanced in the next few years. Vacancy rates in the apartment, retail and warehouse sectors already have exceeded those seen during the real-estate collapse of the early 1990s, Mr. Conway noted. His report also predicted that commercial real-estate losses would reach roughly 45% next year. Valuing real estate has always been tricky for banks, and the problem is particularly acute now because sales activity is practically nonexistent.
...
More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.

There is much more in the article, including a discussion on interest reserves masking bad loans (something we've been discussing for a few years) and "extend and pretend". Hey, hoocoodanode!

Note: REIS reported today that the apartment vacancy rate in cities hit a 23 year high: From Reuters: US apartment vacancy rate hits 23-year high-report and other CRE categories are also seeing rapidly rising vacancies and falling rents.

by Calculated Risk on 10/06/2009 07:00:00 PM

Atlanta Fed research economist Melinda Pitts writes at Macroblog: Prospects for a small business-fueled employment recovery

In a speech yesterday, William Dudley, the president of the Federal Reserve Bank of New York, identified financial constraints for small businesses as a restraint on the pace of economic recovery.

Dr. Pitts excerpt from William Dudley's speech, and then notes:

President Dudley's comments are even more relevant in the current recession if one considers the disproportionate effect the recession has had on very small businesses.

Click on graph for larger image in new window.

Graph Credit: Melinda Pitts, Atlanta Fed research economist and associate policy adviser

This graph breaks down net job gains and losses by firm size since 1992. During the current employment recession, small firms have accounted for about 45% of the job losses - much higher than during the 2001 recession.

Dr. Pitts cautions:

Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

by Calculated Risk on 10/06/2009 04:00:00 PM

From Zachery Kouwe and Eric Dash at the NY Times DealBook: Sternlicht, Ross Strike Deal for Corus Assets

The Federal Deposit Insurance Corporation plans to announce on Tuesday that it will sell about $4.5 billion of troubled real estate loans that it recently seized from Corus Bancshares to a group of private investment firms led by the Starwood Capital Group ...

Under the terms of the complex deal, Starwood and its business partners agreed to pay $554 million for a 40 percent equity stake in the loan pool while the F.D.I.C. keeps a 60 percent stake ... By providing guaranteed financing to the buyers, the government hopes that they will be able finish developing the condo projects or turn them into apartments or hotels.
...
The sale reflects an estimated price of about 50 cents on the dollar for the batch of troubled loans ...

The details are not available yet.

by Calculated Risk on 10/06/2009 02:45:00 PM

Just to complete the CRE circle: rising vacancy rates for apartments, offices, and retail ...

From the Press Enterprise: Vacancy rates among Inland retailers mounts

... Inland retail vacancy rates in the third quarter [were] 11.2 percent ...

That marked a rise from 10.6 percent in the prior quarter, and was well up from 7.6 percent in the third quarter of 2008, according to new data from commercial real estate broker CB Richard Ellis.
...
"I think we're going to be seeing these trends for the rest of this year and for much of 2010," said Matt Burnett, senior associate in the Ontario office of CB Richard Ellis.

The REIS national Q3 retail vacancy rates will be released soon, but here is a preview based on the Q2 numbers:

Click on graph for larger image in new window.

In Q2, the U.S. strip mall vacancy rate hit 10%, the highest level since 1992.

"Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest."
Victor Calanog, director of research for Reis Inc, July 2009