Edward O. “Ned” Handy, president of commercial real estate finance at Citizens Bank, last week said his bank is still well-capitalized despite the economic crisis. But, he added, that doesn’t mean it will be lending to everyone who’s looking to buy commercial property.
“All of us, all the banks, I think, are watching our capital level closely and have some level of capital restraint,” he said as part of a Dec. 2 panel discussion at CB Richard Ellis-New England Providence’s 2008 Market Outlook Rhode Island breakfast. “We have capital, but we too are being very careful with it.”
That banks and private equity firms that have capital reserves are staying out of the market until they know where it’s headed seems to be the current trend in commercial real estate, added Andrew Nathan, founder of Meritage Properties LLC, a New York-based real estate group and another panelist.
“Equally importantly [they are] trying to understand where the market is. It’s very hard to tell what anything is worth today,” he said. “You don’t want to buy in too early and look foolish.”
CBRE’s annual data showed that the across-the-board financial meltdown has slowed Rhode Island’s commercial and industrial real estate markets. And the consensus last week seemed to be that it’s unclear just when the next upswing for commercial real estate will begin.
“The current statewide vacancy of [more than] 2.3 million square feet [of office space] will only be absorbed as the economy expands,” said CBRE Executive Vice President and Partner Jay Fluck. “Some are suggesting that we are at least six months away from a turnaround, while others are predicting no rebound until 2010.”
The statewide commercial market is now 13.39 million square feet, 17.36 percent of which is vacant. At the end of 2007, there had been 13.67 million square feet, with 16.05-percent vacancy, according to the firm’s 2007 market recap.
While annual net absorption – the amount of occupied space added to the market – was 100,386 square feet last year, this year’s net absorption has been a negative 279,876 square feet added to the market that was not filled.
Fluck added that commercial real estate “rebounds” in the Ocean State historically have been “very sluggish compared to other regional markets and I would plan on a longer rather than a shorter downturn.”
In Rhode Island’s industrial market, CBRE Vice President Michael Wall said companies are “taking a more cautious approach to their real estate decisions,” which has started to erode demand.
“The industrial vacancy rate is tracking at 8.6 percent for the year, which is up 0.6 percent from 2007,” he said.
That vacancy rate has been fairly stable for three years. But in 2005, industrial vacancies were at 5.7 percent.
Since 2007, the total industrial market shrank from 49.4 million square feet to 48.2 million square feet in Rhode Island.
Wall said the sale of industrial buildings typically is the most active segment of the Rhode Island market, but sale prices are down – currently running about $30 to $80 per square foot – and buildings are staying on the market longer.
“In the face of credit crisis and rising unemployment, we have seen a drop in the number of transactions,” he said, adding that there’s been an increased focus on leasing space between 5,000 square feet and 20,000 square feet.
Last week’s statistics show a less confident commercial market than was portrayed in CBRE’s “Mid-Year 2008 Market View,” released in September. At that time, CBRE reported a 35,388-square-foot net absorption in Providence.
“I think most people are sitting on the sidelines over the next few months, assuming that the fundamentals are going to continue to deteriorate and that anything they can buy today can be bought better in the future,” Meritage’s Nathan said. •
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