Saudi Gazette

An analysis of commercial real estate values, leasing and vacancy trends shows that any government bailout of the industry will require a painful, significant deleveraging to succeed, Blumberg Capital Partners, one of US leading investment fund managers, said on Tuesday.

The company said in a statement sent to the Saudi Gazette that any bailout plan is working against a legacy of debt time bombs created by imprudent, unrealistic buyers who over-borrowed during the peak of the market in anticipation prices would continue rising unabated.

The Blumberg analysis shows that maturing debt obligations will come under even more stress in 2009 with leasing rates poised to drop an additional 20 percent to levels not seen since 2002, and with office vacancies potentially rising to 25 percent by the end of the year. Indeed, the nation’s office market could take until 2011 to stabilize, the company’s analysis shows.

“Creating a refinancing stimulus is helpful to thaw the credit freeze, but these ticking debt time bombs will make it difficult for our public officials to get their arms around this problem,” said Philip Blumberg, chairman and CEO, as well as firm’s chief investment strategist. “Now, because the global economic recession has worsened over the past few weeks, coupled with layoffs at the front end of the cycle, demand for office space nationally is falling. Until companies can weather this storm and start expanding again, prices will remain low for landlords, and vacancies will rise.”

Such markets as New York City and Los Angeles will be among the hardest hit, with Washington, D.C., and Northern Virginia likely to fare better, according to the Blumberg analysis.

“Some cities are holding up in terms of occupancy levels, including places like Houston, which has been relatively resilient due to the energy markets,” said Blumberg. “However, most of the major hubs of commerce nationally are reporting alarming increases in available office space, which should lead to severely falling leasing rates in cities like New York, Chicago, Los Angeles and Phoenix.”

Blumberg Capital Partners’ new office market assessment, which takes into account the fresh economic data from the past two months, comes on the heels of its widely cited prediction in October that commercial real estate prices in 2009 could drop some 20 percent further- - on top of an anticipated 15 percent drop this year.

Factors which are driving office pricing down are a lack of available acquisition financing, and dramatically lower performance projections taking into account dropping rental revenues and climbing vacancies. These downward trends will be magnified in 2009, according to Blumberg, due to maturing debt obligations, falling property values, and a massive decline in credit availability, which has largely eliminated refinancing options for building owners driving additional properties onto sale market.

“Given the over-leverage in the commercial real estate market, and the ongoing decline in credit, a number of owners will be forced to sell at prices below their debt levels,” he said.