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Tenant Market

Companies can still find a silver lining in today's volatile economy by being deliberate and strategic.

By Doug Haynes | Updated on December 11, 2008

Already diminished leasing activity will weaken further in the months to come, at least through 2009, as core office users in the finance, insurance, professional and pharmaceutical industries reduce staff and occupancies in response to the most dramatic economic downturn in decades. In a market already struggling with high vacancy rates, declining rental rates and increasing unemployment, a tenants’ market is at hand.

Companies are shedding more space, and vacancy rates are forecasted to continue to climb. Rents are heading down, and will continue to fall, before leveling off. Venture capital investments have dropped substantially, and the commercial mortgage-backed securities markets are closed. Sales in commercial real estate have declined over 60% this year. Limited trading is expected as the credit crisis continues to severely limit the availability of financing. Limited new inventory is expected, with relatively few existing construction projects, and virtually no new building anticipated.

The effect on commercial real estate will not be as pronounced as it has been on the residential side, with the exception of some properties that are overleveraged and losing value. Furthermore, it will take time for commercial property loans to mature through the end of this decade and then face the difficult credit markets. While defaults will not be as severe as in the residential sector, it remains to be seen how high default rates on commercial mortgages will go.

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