Staff photo by Vernon Ogrodnek This 4,000-square-foot office building on New Road in Northfield was recently leased by a tenant who is expanding and wants to stay in the area, said Samantha Roessler, vice president of Rose Commercial Real Estate.
By KEVIN POST Press of A.C.Business Editor | Sunday, February 28, 2010
Local and national reports this week indicate the commercial real estate market is finally bottoming, making 2010 the year it slowly begins to recover.
A Congressional Oversight Panel report on commercial real estate loans said $1.4 trillion in such mortgages will require refinancing in 2011 through 2014. The bad news? Nearly half are underwater, with the borrower owing more on the loan than the property is currently worth.
The quarterly commercial outlook from the National Association of Realtors said increased demand for office and warehouse space isn’t likely before 2011.
Southern New Jersey commercial property experts see the same trends, with just a bit of positive activity.
Rich Baehrle, commercial specialist with Vanguard Property Group in Egg Harbor Township, said tight credit is hurting commercial markets because they differ from residential.
“One of the biggest challenges in the commercial market is 90 to 95 percent of loans are written as 5-year adjustable mortgages,” Baehrle said.
In the past, if property owners paid on time and remained in good standing, renewal of the loan was almost automatic, he said. Now, lenders are scrutinizing loans and properties closely.
“If a bank’s not going to renew its commitment, it’s very challenging for the buyer to go out and find another lender,” he said.
A key factor for banks is the amount of rent revenue a property generates. This month’s survey by the Society of Industrial and Office Realtors found that rent concessions are being reported almost everywhere.
“When that happens, it has a negative ripple effect,” Baehrle said. “If the drop is $100,000 a year in rent, which is conceivable, the value of the property might diminish by $950,000 to $1 million.”
Samantha Roessler, vice president of Rose Commercial Real Estate and manager of its shore office in Northfield, said she’s seeing the same factors of tougher financing and tenant instability.
She said development of new commercial properties, particularly retail, will be on hold as the market starts to recover.
“In 2008 it all came down, 2009 was a leveling-off period and we have to rebuild in 2010,” Roessler said. “I think we’re dealing with the product we currently have on the market. Until our vacancies go down a little, we won’t see any new development.”
One problem, she said, is that commercial sellers have not yet made the price adjustments that residential owners managed over a long period.
“And land in our area is a tough sell because of the time frames to get approvals to do anything on it and the costs associated with that,” Roessler said.
There are positives in the commercial sector in the region, but they’re small.
“We’re starting to see an uptick in activity. The NextGen Aviation Research Park is spurring some growth, with two contracts going to be released shortly,” Baehrle said. “Quite a few people are looking at that.”
“We’re doing deals,” Roessler said. “They might not be the largest deals, but there’s still activity.”
The industrial and office Realtors survey’s measure of expected activity registered its first gain — a slight one — in the fourth quarter after declining for 11 straight quarters.
Fifty-five percent of industry professionals expect the commercial market to improve in the second quarter.
The National Realtors outlook predicted worsening conditions this year for the office, industrial and retail sectors, with significant improvement only in the multi-family housing sector.
Office vacancy rates nationwide are expected to increase from 16.3 percent to 17.6 percent by the end of the year and average 17.4 in 2011. Office rents are expected to decline 7.2 percent.
Industrial space is expected to fare a bit better, with vacancy rates rising from 13.9 percent to 14.9 percent, but rents are forecast to fall 9.6 percent.
The retail vacancy rate is expected to increase slightly, from 12.4 percent to 12.7 percent, with rents declining just 2.4 percent this year.
An increase in the number of American households should reduce the multifamily apartment sector’s vacancy rate from 7.4 percent to
6.6 percent. Rents, however, are expected to drop another 3.4 percent this year after falling 3.6 percent last year.