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Office, Storefront Vacancies Mount


Commercial real estate next shoe to drop.

Given the pullback in consumer and corporate spending, it shouldn't be surprising to see a Big Rise in Unoccupied Office Space.

Office vacancies rose sharply in the first quarter, a trend that is expected to continue as a result of layoffs and new construction adding to supply. According to the real estate services firm Grubb & Ellis, first-quarter office vacancies rose to an average 13.6% nationally, up from 13% in the previous three quarters.

Commercial Construction Bust

David A. Rosenberg, chief economist at Merrill Lynch, is reporting Commercial Construction Boom Turns Bust.

Commercial construction has rolled over, driven by the substantial tightening in credit conditions that started late last year. Banks materially tightened lending standards for commercial and industrial loans in the fourth quarter of last year, and by the first quarter they were at a historic high. The regression work we did earlier this year suggested that it took about 2-3 quarters for a tightening in credit to have an impact on building, and the rollover we're now seeing is about right on cue.

San Diego Microcosm

Rich Toscano (aka Professor Piggington) is writing Employment Goes Negative.

San Diego employment has just decreased on a year-over-year basis, falling by 1,700 jobs between March 2007 and March 2008.

That is a very small drop in the grand scheme of things, representing a decline of just .1 percent. But it's the first time in a long time that employment has turned negative at all.

Eye of the Hurricane

Mike Morgan provided a long awaited update on the Florida housing situation last weekend. I talked about it in Eye of the Housing Hurricane - Mike Morgan Update. Here is a snip about commercial real estate in Florida.

Commercial and retail property are also becoming casualties in the back half of the hurricane. Drive through just about any Florida market to see all the For Lease signs on commercial property. Real-estate agents, lawyers, builders, contractors, mortgage brokers, insurance companies, furniture stores and all the rest are going out of business and leaving a flood of office and commercial inventory vacant.

Shopping Center Vacancies

The hard evidence is now in. There can no longer be any denial about what is happening in commercial real estate.

Click to enlarge

The above chart is from Shopping Center Economic Model Is History.

Inquiring minds will want to take a look at the number of bankruptcies, unplanned store cutbacks and the resultant glut of corporate real estate space presented in the above link.

A wave of regional bank failures is headed our way because of leverage to commercial real estate. The Fed can do nothing to stop it.
No positions in stocks mentioned.
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