The 2002 Earlybird Economic Forecast is sponsored by the Business Journal. Bob Dean of Grubb & Ellis compiled four brokerages' data into a consensus. The real estate firms included were Grubb & Ellis, CB Richard Ellis, Colliers International and Cornish & Carey/Oncor International.
The consensus predicts that the largest slowdown is expected in office construction, which may drop 79 %. Industrial construction is expected to slip 57 %, and retail construction may fall 28 %, according to the report.The brokerages say that office absorption, which is the amount of newly leased space, will fall about 36%, and industrial volume will drop 21%. Retail should rise about 1.6%.
The Earlybird forecast says that a recovery should start by the middle of next year. Builders have not complained about a lack of work, as the decline is starting from some of the highest construction levels ever seen in Sacramento.
The advice that these brokerages have is simple. Before getting a loan, get tenants, they say. Pre-leasing of office space plays an important role in getting approval to start construction. Banks usually require builders to sign tenants at a minimum of 25% of the proposed office development. Retail projects should be at lease three-quarters pre-leased to be approved for a loan.
Office preleasing looked good at the start of this year, with 63% of office space pre-leased during the first quarter. During the second quarter, that number dropped to 34%, falling even further to 19.4% in the third quarter. The brokerages say that annual office absorption may fall to 837,000-sf next year. This would make a 36% drop from this year's 1.3 million-sf.While vacancies may rise to 10.5% from the current 9%, landlords may fare better than expected. This number is below the 12-15% that occurred during the 1992-1996 economic slowdown.
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