WORLD PROPERTY CHANNEL ®

(SANTA ANA, CA) -- Office tenants will be calling the shots in 2009 as sublease space grows and landlords agonize over empty units.

The industrial market is in the best position for a quick recovery.

The investment market, already recovering, is expected to pick up steam in the first half as more distressed properties come to market.

Retail developers will rein in expansion plans with many not contemplating new construction until early 2010.

The multifamily leasing segment faces increasing competition from vacant condos and foreclosed single-family residences.

Robert Bach

Those are the highlights of a new Global Real Estate Forecast from Grubb & Ellis Co.

"Tenants will have greater negotiating leverage in 2009 with concession packages becoming more generous as the year progresses," predicts Robert Bach, senior vice president and chief economist of Grubb & Ellis.

"The growing inventory of sublease space will put downward pressure on asking rental rates for direct lease space, which are expected to decline in the range of 4 to 5 percent for both Class A and B space by year-end."

The office construction pipeline contained 90 million square feet at year-end 2008, most of which will be delivered in 2009. Combined with a projected 45 million square feet of negative absorption, including a big jump in sublease space, the new product will push vacancy up by two percentage points to end 2009 at 16.5 percent, Bach estimates.

"Employment growth drives demand for office space and the labor market will be shrinking in 2009," said Bach. "Government and health care will be among the few sectors with growing demand for office space."
 
In this difficult market, Washington, D.C., should be at the top of office investors' buy list, according to Grubb & Ellis' Investment Opportunity Monitor, a proprietary market ranking in which Grubb & Ellis annually measures 60 office, 53 retail, 56 apartment and 55 industrial markets against 13 to 17 criteria important to the performance of real estate investments. (Please see charts below.)

D.C. is "the one market that will benefit from the credit crisis as the government expands to implement its economic recovery plan," Bach says.

Following D.C., on the top 10 list are Portland, OR; Los Angeles; San Francisco; Austin, TX; Dallas-Fort Worth; Houston; Raleigh-Durham, NC.; Boston; and Oakland, CA.

"The Texas markets offer strong population growth, while the others offer strong population growth as well as natural barriers to entry," says Bach.
 
The Grubb & Ellis economist says the  investment market, "which saw transaction volume plummet in 2008 as the financial markets collapsed and the credit markets froze, is expected to see a 15 percent increase in sales volume in 2009 as distressed properties are brought to market, particularly those acquired in the past couple of years with floating rate debt."

Loan delinquencies and foreclosures will increase with more properties returning to lenders, who will be "anxious to sell them."

Debt capital will remain expensive and tight in 2009, but more of it will be available than in 2008, and there will be a slow increase in equity capital flowing into the market from private, institutional and offshore investors waiting on the sidelines.

"The coming year should be more active as the gap between buyers and sellers gradually narrows, with sellers making up most of that difference," Bach says.
 
Debt will be the hot investment type in 2009. Investments could be made in CMBS, collateralized debt obligations or funds investing in these assets.

Or debt investments could be made at the property level with owners seeking to refinance their properties, Bach says.

More equity investments will be made as well in 2009 as investors holding an estimated $300 to $400 billion in institutional, private and offshore equity "begin to deploy their capital in response to falling prices."
 
The outlook is equally challenging for global markets, both developed and emerging.

"The previous contention that emerging markets would largely escape the financial crises in North America and Europe looks to be overly optimistic," Bach says.

"This will not be an ordinary downturn, but rather a structural correction in global capital markets that will impact every sector of the economy and real estate market.
 
"One benefit of the global market correction has been the rapid evaporation of inflationary pressures in most key economies.

"The decline in inflation has left governments less reticent in using interest rates as a weapon in the battle to stave off sharp economic and commercial decline.
 
The industrial market will recover more quickly than the office market because the construction pipeline is set to thin out sooner, believes Bach. 

"Businesses look at industrial space as a productivity enhancer, an integral part of their supply chain strategies. Their relentless quest for cost-saving efficiencies should sustain demand for industrial space in 2009, despite the weak economy.

"However, supply is expected to outpace demand with absorption dipping into the red and the vacancy rate rising by 60 basis points to end the year at 9.4 percent as the construction pipeline delivers space still under way."

On the retail front, Bach says. Retailers will be even more conservative with their expansion plans in 2009, with more store closings and fewer openings.

Consumer spending hit a 28-year low in 2008 "with retailers in the crosshairs of the downturn," Bach says. Grocery store-anchored centers in mature trade areas will hold their ground in 2009 while centers on the urban fringe, where housing construction has stalled, will suffer.

Expect higher vacancies and softer rental rates by year-end.

"Value retailers are garnering the majority of consumers' dollars in this challenging economic climate," says Bach. "Even the luxury retailers, which are usually immune to downturns, are feeling the pain."
 
Multifamily housing will see vacancy rising as well, predicts Bach.

"The housing slump and recession have produced countervailing forces that will both help and hurt the multifamily market in 2009.

"Apartments are seeing some new renters who have lost their homes to foreclosure, while landlords are able to maintain existing renters who are waiting for prices and mortgage rates to fall further.

However, points out Bach, new graduates who can't find jobs are doubling up with a roommate or moving in with a relative to conserve cash.

At the same time, the apartment market faces competition from an increasing supply of unsold condos and foreclosed homes returning to the market as rentals.

"The negative forces are expected to have a slight edge in 2009 resulting in slowly rising vacancies for the multi housing market this year," the Grubb & Ellis economist says.