2010 to offer more of the same for commercial real estate

By Buck Wargo

Fri, Dec 4, 2009 (3 a.m.)

The Las Vegas commercial real estate market next year will mirror this year’s because job growth won’t return until 2011 and foreclosures will depress rents, according to a local brokerage.

Grubb & Ellis reports any recovery will be slow because the labor market isn’t expected to recoup the 8 million to 9 million jobs lost nationwide until 2014 or 2015.

“I don’t think it will be worse. It will be more of the same,” said Dave Dworkin, a research analyst for Grubb & Ellis in Las Vegas. “The positive side won’t come until 2011 and 2012, until the economy turns around. You need stronger job growth and stronger consumer confidence before anything turns around in the commercial market here.”

Foreclosures started to pick up recently and are expected to rise dramatically in 2010, Dworkin said.

Vacancy rates in office, industrial and retail space should remain at historically high levels and there will be little if no development in 2010 as the existing space is absorbed, Dworkin said.

Fewer tenants will move in 2010 because landlords will be willing to work out deals to keep them in place, Dworkin said. Tenants would rather not pay the moving costs, and landlords are starting to treat existing tenants as if they are new.

2010 will be a great year for tenants, Dworkin said.

“For landlords who can afford to keep their properties, they are going to try to get as much as they can. Unfortunately, those not able to hold on much longer are going to be foreclosed upon whether they are vacant or not.”

In the office market, Grubb & Ellis projects that even tenants whose leases won’t expire for another year or two will sign extensions to get lower available rates, Dworkin said.

“Those tenants who were able to renegotiate a lower lease rate on renewal have put themselves in a better position to reduce their overall operating expenses,” Dworkin said.

The one bright spot in the office market is medical offices should do well in 2010 because the demand for health care remains strong, Dworkin said.

That doesn’t mean there won’t be challenges, he added. Many doctors are uncertain of national health care reform and have been requesting short-term lease renewals so they can adjust plans once economic trends become clearer, Dworkin said.

The retail market remains weak because of the recession. Many retail centers scheduled to be completed this year never broke ground, and other projects are on hold until the economy improves, he said.

Retail vacancies have soared into the double digits and lease rates have fallen more than expected, Dworkin said.

Some landlords have even put stipulations in leases to give tenants more options to opt out if the center’s vacancy rate goes above a certain point or if the center’s anchor tenant leaves, Dworkin said.

“Those quality tenants who have made their payments on time and have been able to weather the economic storm are in a better position to renegotiate rent modifications with their landlords and renew their leases,” Dworkin said.

In the industrial market, landlords have started to reevaluate their marketing strategies because of the growing vacancy rates.

Many landlords are offering tenants no rent payments and introductory lease rates for a committed renewal, Dworkin said. The market has become more lease-rate driven, and rates are expected to drop in 2010, he added.

Many companies are renewing for one to three years because of a rise in commercial foreclosures in 2009 and likely increases in 2010. It’s not unusual for tenants to research their landlord’s financials before renewing or moving, he said.

The best deals will come from bank-owned properties because they are working with brokers to market their properties at rock-bottom prices, Dworkin said.

“The sooner the banks can sell or lease some of these buildings and generate revenue from them, the quicker the market will be able to recover,” Dworkin said.

Even though some of these bank-owned sales will drive down property values, opportunities exist for tenants and buyers who may not be able to afford other buildings, Dworkin said.

It’s going to be hard to gauge the value of commercial properties because many sales are happening behind the scenes and not revealing prices, Dworkin said.

Commercial sales were minimal this year, and it’s likely to be the case in 2010, he said. It won’t be until foreclosures ease that pricing will become more realistic, Dworkin said.

Rising foreclosures aren’t necessarily bad because they create incredible opportunities for investors and great deals for tenants, Dworkin said.

Investors are calling banks on a daily basis and because of the volume banks are contacting real estate brokers for assistance with the transaction, he said.

Completing deals, however, isn’t easy, Dworkin said. Because of rising vacancy rates, lenders require as much as 30 percent to 50 percent down with interest rates ranging from 7 percent to 8 percent. They are only financing first-class properties, he said.

“Those investors who have cash are in a better position to obtain distressed properties,” Dworkin said. “Many investors are still waiting for the market to hit bottom before committing to an investment while others feel that now is the time to buy.”