Monday, December 14, 2009

2010 Industry Outlook Hoping for an upward swing in the cycle

Tenants will continue to benefit from favorable lease terms, ‘blend and extend’ renewal options

Office, industrial and retail leasing in North Texas will continue to be challenging in 2010, as job losses and tighter corporate budgets continue to cause tenants to consolidate, commercial real estate executives say.

It will continue to be a tenant’s market and “blend-and-extends” will continue to be common in the office leasing landscape in 2010, said Steve Thelen, managing director of tenant representation for the Dallas office of commercial real estate firm Jones Lang LaSalle.

The strategy, which became common in 2009, involves tenants with a few years remaining on their leases signing early renewal agreements with their existing landlord to add a few more years to their current lease. The rental rate on the additional term is blended into the existing rate to create a “blended rate” that’s lower than the original. This allows the landlord to keep a tenant, and allows the tenant to achieve a lower rental rate immediately.

Overall, the North Texas office market will see vacancy rates rise slightly in 2010, and lease rates during the next 12 months could drop another 10% as landlords reduce rents to attract and keep tenants, Thelen said.

“I think the job losses are probably going to level out over the next 12 months,” Thelen said. “But we’re still going to have capital constraints on both tenants and landlords, so some companies aren’t going to want to spend the money to relocate, and landlords are going to view occupancy as much more important than rates.”

Slow office demand

Office demand will remain slow into 2010, according to a forecast by the commercial real estate firm Cushman & Wakefield of Texas Inc. Tenant demand dropped sharply through this September. Overall absorption ror the third quarter of 2009 decreased 271% when compared to third quarter 2008, with the market giving back a collective 1.77 million square feet.

John Hoctor of the commercial real estate services firm Altschuler Hoctor Co. said office building landlords might be able to make up some lost ground in 2010.

“Although we would certainly love it, we’re not looking for 2010 to be a year of huge recovery,” Hoctor said. “However, we do anticipate that more companies will loosen up their restraints on additional space requirements and begin to (lease) office space again in 2010. If you’re an owner of vacant space, you’ll have a chance to fill it in 2010.”

Industrial activity wanes

On the industrial side, North Texas absorption will continue to decrease in 2010 and possibly 2011 as well, said Jeff Thornton, Duke Realty Corp.’s senior vice president for Dallas operations.

“2010 will be tough,” Thornton said. “We’re hoping to see signs of market recovery in 2011, with stabilized absorption, and we’ll start seeing positive absorption and rent growth in 2012.”

Industrial lease rates fell by about 30% in 2009, when factors such as free rent and other tenant concessions are factored in, Thornton said.

Speculative development of industrial space, which dropped sharply in 2009, won’t restart until at least 2011, Thornton said.

In Dallas-Fort Worth, absorption of industrial space decreased by 3.9 million square feet through the first three quarters of 2009, according to Grubb & Ellis Co. Almost 81 million square feet of industrial space sits vacant.

The industrial vacancy rate increased to 12.2% during the third quarter, up about a point from the same time a year ago, the Grubb & Ellis report says. The G&E forecast calls for the overall industrial vacancy rate to rise to about 13% percent within the next year, as demand for space remains weak.

Retail opportunities

Filling recently vacated big-box retail space will continue to be difficult in 2010, said Earl Harris, senior vice president and director of project leasing for Dallas-based The Weitzman Group.

“I think it’s going to be another very busy year,” he said. “There’s a good number of local and national retailers out to make deals.”

Despite the closure of national retailers such as Circuit City, Steve & Barry’s, and Linens ’n Things, occupancy at North Texas shopping centers dropped only slightly in the first half of 2009. The area’s retail occupancy rate was 87% at midyear, down from 87.6% at the end of 2008, according to a report from The Weitzman Group.

Harris predicted absorption of retail space will be flat in 2010.

“In D-FW, we have a strong history of backfilling second-generation space,” Harris said. “The good locations will get backfilled, but landlords are going to have to get creative on uses and configurations to get tenants into their buildings.”