Jeremy Glaser, equity analyst at Morningstar
Once immune to the residential mortgage shakeout, credit problems are spreading to commercial real estate.
“This is the worst time for brokerage houses in the last decade or more,” said David Begelfer, chief executive officer of the Massachusetts Chapter of the National Association of Industrial and Office Properties (NAIOP).
Two of the nation’s largest commercial brokerage houses with offices in Boston saw earnings plunge in the second quarter. Jones Lang LaSalle said quarterly profits fell 69 percent, as higher leasing commissions and property management fees failed to offset a decline in building sales commissions. Its second-quarter net income plunged to $24.5 million, or 73 cents a share, from $77.9 million, or $2.32 cents per share, during the same quarter last year.
JLL’s competitor, CB Richard Ellis Group, said quarterly net income dropped 88 percent, in part due to lower brokerage fees from sales that have nearly disappeared due to the severely constrained global credit markets. Second-quarter net income fell to $16.6 million, or 8 cents per share, from $141.1 million, or 59 cents per share, one year ago, the company said.
Analysts say while Boston’s fundamentals are strong, with office vacancy rates in the single digits and average asking rents nearing $65 in the city’s Financial District, few sales are taking place because buyers can’t get financing and property prices remain high.
“There’s a freeze between buyers and sellers, so you have people who want to buy, but sellers unwilling to lower their prices,” said Jeremy Glaser, an equity analyst at Morningstar, a Chicago-based provider of independent investment research. “As a result, the transaction volume plummeted and that’s behind the disappointing second-quarter results.”
Credit Conundrum
The major reason for the dramatic drop in profits is the credit crunch, Glaser said. “The commercial real estate market is starting to see the effect of reduced credit,” he said. “The big firms thrive on transactions, and there hasn’t been much buying and selling.”
While several office towers are in the pipeline in major markets including Boston, financing is hard to find.
“There’s lots of fear and there’s so much uncertainty surrounding the economy that many lenders prefer to wait and see,” Glaser said. “Projects may get off the ground if they can convince the banks that this is just a slowdown and not a recession.”
NAIOP’s Begelfer said he expects sales and leases to revive next year. “People have to make decisions to buy or lease and they’re putting them off for now, but they can’t put them off indefinitely,” he said. “Buyers want to buy, sellers want to sell and tenants want to lease space. Unless there’s a major recession, I think equilibrium will return as rents stabilize and sales prices drop in 2009.”
But Morningstar’s Glaser is not so sure. “If you can tell me when gas prices will drop below $2 a gallon, I’ll you when the commercial market will revive,” he said.
