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Commercial Real Estate Reaches Saturation Point

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Office volume down 50% to 91%; industrial space at decade low; retail vacancies at 7.5%

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Retail, office, and industrial real estate are all suffering to various degrees.

Let's take a look at all three, courtesy of CoStar, starting with Rapidly Falling Prices Changing Dynamics of Office Leasing, Ownership.

"The second quarter of 2009 saw leasing and sales conditions across the U.S. office market plummet at a rate unforeseen in previous analysis by CoStar Group, Inc. In particular, CoStar confirmed that the value of Class A office buildings has declined by 57% compared with prices paid at the peak of the market in 2007.

In addition, office-leasing activity is off 39% from year-ago levels and all but three U.S. office markets posted negative net absorption over the first two quarters of 2009."


Costar also recently reported that the industrial vacancy rate rose to 9.8% at the end of the second quarter of this year, while the amount of negative net absorption approached 100 million square feet in the first two quarters of 2009 -- both highs for the decade. ('Demand for U.S. Industrial Space Falls to Decade Low").

And rounding out the trio is this report, "Retail Markets Continue to Struggle in Q2, but Some Improvement in Sight."

Jay Spivey, CoStar Group's Senior Director of Research & Analytics, compared the retail sector's historical quarterly net absorption to job growth statistics, "showing the two are highly correlated, which means that once the job market improves, we should expect retail absorption to improve shortly after."

"The market has not been overbuilt in this most recent cycle. CoStar forecasts there will be about only a .7% increase in retail inventory during 2009, which would be the lowest number ever, so new deliveries are not a part of the problem this time around," Spivey added.

I certainly agree with Spivey in regards to jobs and vacancies being correlated. However, I disagree with Spivey's assertion "The market has not been overbuilt in this most recent cycle."

I claim the market has hit a saturation point after decades of over-building. One gets used to seeing a certain rate, say 1.4% historical growth and concludes it is forever sustainable. It isn't. Moreover, everywhere one looks there are miles of strip malls, Pizza Huts (YUM), Wal-Marts (WMT), Targets (TGT), Home Depots (HD), and Lowes (LOW) as noted in The Point of Negative Returns.

With boomers headed into retirement under-funded and deep in debt, don't expect a return to so-called "normal" spending patterns anytime soon. Consumers at long last have come to the painful realization that their home is a place to live and not their retirement plan, while banks continue to tighten lending standards across the board.

As noted in April 2008, the Shopping Center Economic Model Is History.

Pressure will remain on commercial real estate (and real estate in general) for another decade.

No positions in stocks mentioned.
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