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Commercial RE Outlook Bleak

May 22, 2009 | Comments: 1
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REG | VNO
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We highlight Regency Centers Corp. (REG - Analyst Report), and Vornado Realty Trust (VNO - Analyst Report).

The National Association of Realtors issued predictions for four major sectors of commercial real estate this week. According the report, national office vacancies are expected to increase from 16.1% in 2009 to over 20% in 2010 with rents falling about 7% this year and 0.8% next year.

Retail vacancies, which were just under 10% in 2008 are projected to rise to 12.1% in 2009 and 15.8% in 2010. Rents are expected to fall 2.1% in 2009 and 1.5% in 2010. Industrial vacancies are expected to increase to 11.9% in 2009 and 12.6% in 2010 with rents falling 3.4% this year and 4% in 2010.  Multi Family is expected to fare the best; vacancy is expect to increased to 6.8% this year and 6.7% in 2010 from 5.7% in 2008 with rents slightly growing this year and next.

If these predictions are accurate or close to accurate, there will be more pain in commercial real estate, and we are nowhere near a bottom -- especially in office and retail. Loan delinquencies have been increasing in both segments in early 2009 and they could spike over the next two years.

Going forward, overweight multi-family, which continues to benefit from lower home ownership rates and less new supply. Invest in retail and office selectively; only companies that have a handle on their debt maturities over the next couple of years which will help them withstand a prolonged downturn.  In retail, we still recommend Regency Centers (REG - Analyst Report), and in office Vornado (VNO - Analyst Report).

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Dirk van Dijk, CFA wrote...
Are these posted rents or effective rents, I suspect that the landlords might be throwing in things like free renovations, or months of free rent when the lease is signed. The picture is likely bleaker than the shills at the NAR let on (i.e. look at their wonderfully accurate commentary tdurring the whole housing downturn, lol)
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