Though he has seen some increased activity in the latest 90 days, GVA Kidder Mathews Chairman and CEO Jeff Lyon told Tacoma Pierce County Chamber directors this morning that the broad values of commercial real estate have dropped 35 to 50 percent in the past two years.
And problems will worsen for property owners – and lenders – as an estimated $600 billion to $800 billion in commercial property debt around the nation comes due in the next two or three years.
“Landlords need to keep every tenant they have, so leasees have bargaining power in today’s market,” Lyon said. “Every sector across the board is down and everybody is sitting on the fence” due to fearfulness about their business’ future.
Office space vacancy in Pierce County is 11.1 percent now, but the true picture looking forward depends on what decision Russell Investment Co. makes in its consideration of moving to Seattle. Downtown areas of that city and Bellevue show office vacancy at 9 percent now, with Lyon forecasting 15 percent in 2009-2010. South King County office vacancy is 12.4 percent and headed to 14 percent going forward.
“All retailers are simply trying to survive,” the commercial real estate expert said.
Some merchants are simply walking away from their retail space and landlords can expect any empty storefront to remain that way for two years in the current market. Retail vacancy is now 10 percent in Pierce County, compared to 5.26 percent in 2008.
Retail tenants have a strong position in today’s situation and are asking for reductions in their lease obligations up to 50 percent. Lyon says some landlords are willing now to accept percentage rents, rather than fixed rates more common in better times. Tenants are also asking lessors to pay for build-out costs in order to fill the space.
Lyons’ most hopeful outlook is that “there is tons of capital on the sidelines, waiting to know we have hit bottom.” Then, they will swoop in and acquire distressed properties at significant lower values.
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