As the economy goes, so goes commercial real estate -- eventually. The two don't march in lock step.

Commercial real estate typically trails the economy by at least a year. While the economy shows some springlike signs of life, commercial real estate is heading into deep winter.

"We expect leasing fundamentals to continue to weaken through 2009 and 2010 pretty much in all markets," said Maria Sicola, executive managing director of research at global real estate firm Cushman & Wakefield.

Many analysts predict the economy will start rebounding late in 2009 as stimulus money and loosened credit take hold.

But commercial real estate, up against continued job losses and a looming wave of loan maturities, won't start its return until late in 2010 at the earliest, they expect.

Bounds Of A Rebound

When it does, it is apt to reset to pre-bubble years 2003 and 2004, says Ray Torto, chief global economist at real estate giant CB Richard Ellis.

"We're all adjusting to a very extravagant night out," he said. "So you have to adjust back to more normal times."


Prices for commercial properties kept surging even as home prices tanked. The commercial side didn't really buckle until late in 2008 and the first quarter of 2009, a year after the recession began.

The fall was fast and hard.

Property data tracker Real Capital Analytics estimates that almost $73 billion in U.S. commercial assets is in distress, up from $19.3 billion in 2008's third quarter and $3.9 billion in early 2008. Some properties are on hold midconstruction, others are delinquent on loans or in default, or face liens or foreclosure.

Commercial property values have dropped as much as 40% since their peak, says Craig Leupold, president of Green Street Advisors.

Multifamily housing, he says, saw the fastest drop in rents and occupancies because this category has the shortest leases, typically one year. Offices and retail, in contrast, have three- to 10-year leases.

Mixed Results Appear

Apartment valuations have dropped less than other commercial sectors because financing still remained available at relatively good rates from lenders Freddie Mac and Fannie Mae.

Unable to refinance $3.3 billion in debt, mall giant General Growth Properties recently filed for Chapter 11 bankruptcy.

The U.S. office vacancy rate rose to 14.7% at the end of the first quarter, 70 basis points higher than the prior quarter, CBRE says.

Some commercial real estate sectors and locales will revive sooner than others, observers predict. One rule of thumb: Those that fell first are destined to come back first.

Multifamily housing will be in the first wave, Leupold says.

The last to recover will probably be retail -- especially malls -- due to continued job losses and declines in household wealth. Office space also will lag.

"Industrial is in the middle of the pack in terms of its recovery," said Leupold. "To the extent retail is hurt, industrial is hurt because it relies on distribution. But a lot of industrial use is tied to manufacturing, which gets better as the economy comes back."

Some markets not affected early on will take longer to recover, industry sources say. Most notable are areas with high doses of financial services and investment banking, such as New York and San Francisco.

New York City's comptroller forecasts 165,000 job losses this year, many due to Wall Street layoffs.

Cities Apt To Shine Early

Cushman & Wakefield expects the Southeast, except Florida markets like Miami, to fall into the second-latest group of markets to recover.

Areas expected to climb back on the earlier side are ones not so reliant on banking and insurance -- such as Chicago, Minneapolis and Philadelphia, as well as Washington, D.C. There, Homeland Security and other government agencies have been taking new office space.

Though hit by financial services woes, Boston is diversified with technology, biotech and higher education jobs.

Other markets apt to come back soon are small and sidestepped the housing bubble. Torto says most of Texas is in that boat with Portland, Ore., and Nashville, Tenn.


Falling oil prices affected Texas starting in late 2008. But its housing market has stayed relatively stable.

"Places that lived off the trough of the single-family construction boom like Nevada, Southern California, Arizona and Florida partied the most, and they're going to fall the greatest," Torto said. "Those states will come back last."

Southern California's hard-hit Orange County, where office vacancies hover at 20%, might be an exception and return soon.

California Comeback?

Orange County got into trouble early. Many mortgage bankers worked on subprime lending there in the boom, but lost jobs in the bust.

"We expect it to be among the first group of markets to recover, bolstered by refinancing activity and a return of liquidity to the credit markets," Sicola said.

Long-battered Detroit will come back "someday, maybe in our lifetime," Torto said. "It depends on restructuring the whole (auto) industry. That will take longer than a cyclical change."