Boston-area commercial real estate sales plunge

'08 decline creates pricing uncertainty

If you think selling a home was tough in 2008, be thankful you weren't trying to unload an office building.

Sales of Boston-area commercial properties plummeted 86.5 percent last year, with about $1.35 billion in property changing hands compared to $10 billion in a red-hot 2007, according to the global real estate firm Jones Lang LaSalle.

The drop-off portends a turbulent 2009. Now, real estate investors don't have data to guide them in pricing properties in the soft economy, making it less likely that buyers will come forward out of fear of overpaying.

"Its a huge challenge right now for investors to figure out if they're getting a fair price," said Lisa Campoli, executive vice president at commercial brokerage Colliers Meredith & Grew. "During the last downturn in the 1990s, we had the S&L crisis and some banks went under, but there wasn't the global lack of confidence we're seeing right now."

Commercial real estate is the latest sector to be hit by the deepening recession, with the fallout just now sweeping through Boston and other markets. Rents are starting to fall sharply as vacancies pile up.

The impact is especially severe in New York City, where there is a large increase in space available for subleasing, a key measure of weakness in the office market. Available sublease space in Manhattan has increased 43 percent from the end of 2007 as foundering financial companies have rapidly shed jobs and floors of offices.

In Boston, the numbers are not as dramatic, although real estate firms are starting to see similar weaknesses. Available sublease space nearly doubled in the fourth quarter of 2008 from the third quarter, to about 900,000 square feet, according to Cushman & Wakefield. Rents are beginning to slide some, too, though industry officials expect a greater drop in lease prices in coming months.

Still, Boston is not expected to see sublease space jump to 2004 levels, when a wave of financial mergers and turmoil among technology firms put 2.5 million square feet on the market.

Real estate professionals say the relative strength of Boston's office market - its low vacancy rate and lack of new construction - should help fuel a rebound in sales activity in 2009.

However, insurance companies and other large lenders to commercial buildings continue to reserve cash, which only begets stagnation because buyers cannot finance transactions.

"The key to any meaningful transaction volume in 2009 is the opening of the credit markets," said Michael Smith, managing partner at Jones Lang LaSalle. "When credit becomes available, transactions will begin to flow again."

When that happens is anyone's guess. The uncertainty in credit markets is being fueled by a reevaluation of the way property acquisitions are financed. Real estate professionals say they expect lenders to become stricter, requiring buyers to plunk down 40 to 50 percent of the purchase price in cash in order to get a loan.

Those numbers are analogous to residential lenders requiring 20 percent down payments from home buyers. In both cases, lenders are seeking a return to far more conservative standards after years of little-or-no-cash-down transactions.

Ironically, industry executives said, the impact of those deals may end up helping to fuel the rebound, because owners who stretched to buy buildings in 2006 and 2007 are now facing debt burdens that will cause them to put those assets back on the market, likely at a much lower price.

Edward Maher, an executive director at Cushman & Wakefield, said the firm expects to market about a dozen downtown major properties in coming months. "There are buyers with plenty of dry powder waiting to get back in the market," he said. "The only problem is, nobody wants to be first."

Casey Ross can be reached at cross@globe.com.