Commercial real estate fundamentals in 2010 will decline more slowly than in 2009 with most property types reaching bottom near the end of the year and beginning a slow recovery starting in 2011, according to a national forecast by real estate services and investment firm Grubb & Ellis Co.  

"The national economy has begun a slow and cautious recovery, but the labor market, which often lags the broader economy, will turn around only gradually with sustained improvement unlikely before the second half of 2010. Because commercial real estate lags the labor market, it still has a ways to go before reaching its own low point," said Bob Bach, senior vice president and chief economist of Grubb & Ellis. "The good news is that the freefall we saw in 2009 is over and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again."

The investment market, which saw transaction volume maintain artificially low levels in 2009 as banks, CMBS servicers and other lenders delayed working through distressed assets, will start to see some of these assets finally come to market in 2010, prompting an increase in sales volume of 20 percent to 30 percent over 2009 levels.

 Prices may decline another 10 to 20 percent in order to meet buyers’ expectations, according to the forecast.

Nationally, the office market begins 2010 approaching record-high vacancy rates and the most sublease space available since the "dot-bomb" era. According to Grubb & Ellis, a rebound in the office sector is heavily dependent upon employment, and the slow job growth inherent in a sluggish recovery will delay improvement in the office market.

The national office market’s vacancy rate is expected to reach 18.5 to 19 percent by the end of 2010, the highest on record since Grubb & Ellis began tracking the national market in 1986. Other leasing fundamentals are also expected to continue to deteriorate, albeit at a slower pace before reaching a growth point in 2011.

The company expects the market to register an additional 25 million square feet of negative net absorption and rental rates to decline 2 percent in 2010, compared to 62 million square feet of negative net absorption and a 5-percent reduction in rental rates in 2009.

In the office sector, Austin, Texas, took the top spot on Grubb & Ellis’ Investment Opportunity Monitor, a proprietary market ranking in which Grubb & Ellis annually measures 59 office, 54 industrial, 53 retail and 56 apartment markets against 13 to 17 criteria important to the performance of real estate investments. Austin, Raleigh-Durham, N.C. (No. 5), and Denver (No. 10) are all anchored by top-notch universities and state governments, and the cities offer advanced business bases and the ability to attract young, educated workers.

Despite increases in vacancy and negative net absorption, economic indicators that generate demand for industrial space saw upticks in late 2009.

Leading market indicators for the industrial sector turned earlier than those for the retail and office markets, Grubb & Ellis reports. Vacancy in the industrial sector is expected to reach 11.4 percent by the end of 2010, 70 basis points higher than year-end 2009. Landlords will have to weather 75 million square feet of negative net absorption, though that figure represents less than half of the 158 million square feet of negative net absorption in 2009. Warehouse rents will decline 5 percent, an improvement over the 6 percent decline in 2009.

As the manufacturing sector and global trade bounce back, look for port-related industrial markets to lead the recovery – those anchored by either sea ports or inland ports.

With a significant recovery in job growth unlikely to get underway until later in 2010, Grubb & Ellis expects the national retail vacancy rate to continue to climb, contributing to additional negative net absorption. Recovery in retail will be weak in 2010, but it will begin to generate demand for retail real estate starting in 2011.

Similar to the other sectors of commercial real estate, job growth is key for a robust recovery in the multi-housing arena. The apartment market suffered in 2009 as college graduates had trouble finding jobs and the growing wave of residential foreclosures increased the supply of shadow units – unsold condominiums and houses being offered for rent.

Longer term, apartments will benefit from the decline of homeownership rates to pre-bubble levels or less, as well as increased volume of 20- to 29-year-old apartment seekers as the boomers’ kids move out on their own.

Of the Top 10 apartment markets ranked by Grubb & Ellis’ Investment Opportunity Monitor, six are on the West Coast – five in California alone – with the remaining four markets located on the East Coast. With the exception of Atlanta (No. 7), which has shown an incredibly high level of growth over the past decade, all of the markets offer barriers to entry and high home prices. Los Angeles ranks first, followed by Washington, D.C., Orange County, Calif., San Diego, Oakland/East Bay, Calif., Long Island, N.Y., Atlanta, Portland, Ore., Westchester County, N.Y., and San Francisco.