Real estate ills expected to spread to offices
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Real estate ills expected to spread to offices

Fallout from the implosion of the residential-housing market will dampen what has been a white-hot commercial real-estate market, Valley economist Elliott Pollack told a group of commercial brokers and developers Thursday.

But exactly when that will happen and to what degree it will have an impact depend on the sector.

The commercial-office market is getting hit first.

It has begun to experience fallout from the subprime crisis as mortgage brokerages, title companies and financial-services firms downsize or close up shop, said Pollack, who was the keynote speaker at a meeting of the Society of Industrial and Office Realtors’ Southwestern chapter at the Arizona Country Club in Phoenix.

“We need half the mortgage brokers that we have,” he said. “That’s how much excess capacity there is in that business. Half of them are going to go away. Sublease space is going to be a problem.”

The fact that home builders are still adding inventory to the residential market, when there is an excess of existing homes, means that the true impact on the commercial-office market likely won’t be felt until later this year or in early 2008, Pollack said.

The industrial sector will also be hurt, but it will probably be 2009 before the effects start to show.

That’s because businesses that supply home builders with goods and services will need less warehousing and distribution space as the housing slowdown drags on.

“If you’re in the industrial business, you should be working your butt off, because in two years, you should be playing golf every day,” Pollack said. “This is going to catch up with you.”

Despite the slowdown in residential real estate locally and nationally, the Valley’s commercial real-estate sectors have remained extremely strong. Developers are continuing to plan and complete new projects, and businesses are absorbing the new space at a healthy pace.

The industrial market, in particular, is booming with 4.97 million square feet of new space added in metro Phoenix during the first nine months of 2007. An additional 6.7 million square feet are under construction, according to numbers released earlier this week by brokerage firm Colliers International.

Average rental rates for such space are up almost 70 percent over past year, and overall vacancy is down.

But Pollack and other analysts say that trend is on the cusp of cooling because financial woes related to the adjustable-rate and subprime mortgage debacle are far from over.

Numbers that Pollack presented show that $700 billion in adjustable-rate mortgages, which start out with lower payments and balloon after a certain amount of time, are resetting between last month and December 2008. That’s in addition to $263 billion in adjustable-rate mortgages that already reset between January and August.

Consumer spending, especially as it relates to home furnishings and appliances, is expected to drop, which will have an impact on industrial and retail real estate, Pollack said.

By Andrew Johnson, The Arizona Republic

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