Though office rents will not grow and leasing volume will be down in 2008, the Westchester County commercial real estate market is positioned to weather a recession that might not be as severe or as lengthy as one that rocked the industry in the early ”™90s. And it might not officially qualify as a recession at all.
That was the outlook of real estate players and analysts at the recent ninth annual Westchester/Fairfield Market Forecast sponsored by CB Richard Ellis Group Inc. at The Ritz -Carlton Westchester in White Plains. Panelists described too a much-changed commercial real estate market from a year ago in which cash abounds but trades are down and where the large, high-leveraged deals of recent years are no longer seen.
Jon Southard, forecasting director at Torto Wheaton Research, an independent research firm owned by CB Richard Ellis, predicted “a very mild slowdown” and, especially with commercial real estate, “something much less” than the recession portrayed in press stories that have taken hold with the public.
Unlike past recessions, this downturn has been countered by an “unprecedented amount of activity” from the Federal Reserve Board and in government fiscal policy in the areas of housing, consumer spending and business spending, three “tipping points” for recession, Southard said. Another key economic indicator, labor-market wages, were at their strongest at the start of the downturn, suggesting this will be “a slowdown period rather than a stop period or a reverse period,” he said.
Unlike the ”™90s, when banks and companies had “iffy balance sheets,” “We have companies sitting on hordes of cash,” which could replace some of the void in the debt market, he said.
“If it really is just a matter of confidence, it”™s something that turns around quickly again,” he said.
Southard said national employment numbers in February dropped for the first time to recessionary levels. Six months of such readings are required for an official recession, which might be avoided, he said. “This economy really has been quite resilient up to this point,” he said.
In the last four years, vacancy rates have dropped nationally for commercial real estate, Southard said, and are not nearly as high as in the last recessionary cycle. In 2007, vacancy rates in the Westchester and Fairfield County, Conn., markets were at 30 percent to 60 percent of their long-term average. After years of marked growth, office rents this year will be stable, “but stable at those very high levels that we saw grow in 2005 and 2006,” he predicted. Especially in the metropolitan area, commercial real estate is positioned “to absorb some body blows when the other areas of the economy slow down,” he said.
In 2007 in Westchester, overall asking rents were up an average of $3 per square foot, a 6 percent increase, said Robert Caruso, senior managing director at CB Richard Ellis. This year, “Westchester will perform better than most people expect,” he predicted.
Across the county, the direct average rent for class A buildings in the first quarter of 2008 was $31.92, up from $31.19 in the first quarter of 2007, Cushman & Wakefield brokers recently reported. In the White Plains central business district, the direct average rent for class A space was $35.43 in the first quarter, up from $32.09 in the first quarter last year, according to Cushman & Wakefield.
In commercial real estate, “There is a ton of inventory; there are fewer trades,” said Jeffrey R. Dunne, vice president of CB Richard Ellis”™ New York Tri-State Investment Team. Dunne predicted trading volume this year will fall back to the 2004 level.
“The reason that those deals aren”™t trading is that those deals need conventional financing” that is no longer available. Of the deals being done, “A lot more have raw cash,” he said. “A lot more have low leverage. A lot more are under $30 million.” Banks are not doing the $50 million to $100 million deals, he said.
“The profile of the buyer and the profile of the deal are very different than it was last year,” Dunne said.
With the enormous increase in liquidity, “We”™re sitting on a lot of capital,” said James J. Houlihan, a partner at GHP Office Realty L.L.C. in White Plains. Though the firm last year purchased a national portfolio of office and industrial properties from Verizon Communications Inc., it has been difficult to find new acquisitions “given the cataclysmic change in the debt structure,” he said. “Any big deal over a certain size is almost impossible to finance these days.” Regarding the Verizon deal, Houlihan said, “You couldn”™t finance it today, period.”
“There are two different types of people in America today ”“ those with liquidity, and those without,” said Anthony E. Malkin, president of W&M Properties.
Malkin said his company”™s submissions for property transactions have shrunk dramatically. “It”™s going to be really surprising to see what happens because there”™s a lot of money and not a lot of transactions.”
Malkin predicted the downturn will last 12 to 18 months. Comparing conditions today with the recession of the early ”™90s: “There’s no comparison for the real estate market, I think.”
Yet in a changed market where commercial mortgage-backed securities debt has dried up and massive foreign sources of investment such as China and Abu Dhabi could be drawn to U.S. real estate trading, “There will be a lot of people who will not still be in this business because the business model doesn”™t exist anymore,” Malkin predicted.
Carl R. Kuehner III, president and CEO of Building and Land Technology in Norwalk, Conn., saw opportunity to buy class A office properties at discount in the current economy. “We actually look forward to this,” he said. “We like the dislocation.”
“This should be the opportunity in all of your careers,” Kuehner told the audience of real estate owners and brokers. “This is an opportunity to make the most money we”™ve ever made.”
