Welcome to 2010.
   If we were adjusting in 2009 to the near meltdown of the financial system with its corresponding pendulum swing to a dearth of liquidity, rising unemployment, loss of speculative pricing for real estate, and a major consumer spending pullback, then 2010 will feel the largest impact of all those factors.
   Commercial real estate is a lagging indicator.
   While housing may have led this downturn, commercial real estate will feel the effect most significantly in 2010 and 2011. The impact will be felt across all sectors of the commercial real estate market: office, industrial, retail, multifamily, land and finance.
   The good news is if you are in Central Texas in any aspect of the commercial real estate market, thank your lucky stars.

The Dominos

   Lenders are reluctant to foreclose due to the impact on their fragile balance sheets. “Pretend and extend” is the main tactic with bank regulators’ tacit approval in an effort to mend the system. At the same time, valuations are declining in the office and industrial sectors due to slower leasing velocity, increased vacancy due to business pullbacks and contraction, along with additional inventory added in the past 24-36 months resulting in lower rental rates.

   With a market stalled at valuations investors don’t see as realistic, sales activity is spotty at best. According to CoStar, Central Texas has seen office sales volume go from about $400 million in 2006, to less than $10 million in 2009. While according to Capitol Market Research vacancy is 22.9% citywide, 2010 should see more sales by number and moderately increased transaction volume, provided that there are no significant shocks to the financial system; however, nothing like we saw at mid-decade.
   Industrial sales volume for 2009 was at 10% of 2006’s transaction value. Significant new supply added in 2007-2009 combined with significantly reduced absorption and a declining manufacturing sector portends a vacancy rate that may exceed that of anytime in the past 18 years.
   Multifamily rental rates continue to fall as, again, significant supply brought to the market in 2007-2009, combined with a lack of continued strong job growth is having its effect. Sales volume was at less than 20% of 2006 for the past year.
   Retail is the poster child of this recession faring not differently from the other sectors. Having prospered through the tech bust of the early 2000’s when all other commercial real estate sectors faltered, retail appears to be bearing the brunt of the downturn this time around. In Central Texas, rates are falling, tenants are seeking rent relief and vacancy is increasing.

   Land, always the first to go into a downturn and the last to come out, in 2009 was the year of the “drawing board project’ awaiting the economic uptick. Land in the path of growth needs growth. Projects planned and drawn need tenant demand and rental rates to support them. Vacancy in existing properties is the inhibitor to an increase in land prices.

The Rest of the Story

   For 2010, Central Texas real estate looks to be one of survival, with 2011 a bottom and turn for the better, and 2012 and beyond a return to the positive market growth that Central Texas has been known for.
   Office will benefit from start-up companies being funded, continued internal growth of existing companies and in-migration due to the attractiveness of Central Texas to live, work and play and the pro-business climate of the State. Of no small impact is the underpinning of State government’s location in Austin. The growth of government continues unabated benefitting Central Texas.
   Industrial will benefit from Central Texas growth and Austin’s central state location. Flex space will continue to offer a lower cost alternative to traditional office and the transportation corridors opened on the east side will attract tenants to projects in the historical southeast and northeast industrial segments.

   Retail and Multifamily will benefit from the continued Central Texas population growth that, with recovery in the general economy nationally, will provide an impact as positively as possible for both these sectors. While the tenant demand in both sectors is cost conscious, the good news is that there will continue to be demand in 2010 and further increasing demand as we move deeper into the new decade.
   Land for new development will be attractive in the path of growth, in the central city and along the transportation confluences. New roads will open new access and the regional impact of the attractiveness of Central Texas will be felt from San Marcos to Georgetown throughout 2010 and beyond.
   Look for these signs of a turnaround: employment, increased leasing velocity, increased lease absorption, increased number of sales / transaction value, and more loans made.
   Recognize that the primary engines of economic growth will be technology, health care and education. All in all, while 2010 appears to be a less robust year than the past few in Central Texas and while there is no knowing of the larger impact of economic forces at work which precipitated our region’s issues, there can be no question that the outlook for commercial real estate in Central Texas is extremely positive for the mid-term and long-term.
   There simply is no better place than Central Texas to be in the nation.

Mike Kennedy is President of Commercial Texas