Office sector expected to face “substantial” headwinds in 2008

The US office sector is expected to face “substantial” headwinds over the next two years as the credit crisis impacts on the country’s real estate markets.

Real estate management firm, ING Clarion, warned the credit market dislocation would hit the office sector, with national vacancy rates expected to rise to more than 14 percent in 2008. Finance centers such as Manhattan, San Francisco and Boston could be hit as large financial institutions make large-scale cutbacks because of subprime losses, the firm added.

As a result, investors were increasingly looking for high-quality office properties in core markets. “Selectivity in regard to market, property location and pricing is increasing in importance,” ING’s report, Real Estate Investment: Finding Value in a Changing Market, said.

However in its review of the US real estate market, ING said the office sector was poised to experience a strong recovery by 2010 to 2011, with investments made now “well-positioned to capture this coming upturn cycle.

“There is no doubt that 2007 was a transition year for US commercial real estate. Triggered by the subprime fallout and credit crisis, it appears that the outsized investment returns of the past several years have come to an end. Looking forward, ING Clarion anticipates that 2008 will be fraught with challenges as well as opportunities,” the report’s executive summary stated.

Among the report’s main findings were that the US commercial real estate market was generally sound with all-cash and low-leverage institutional investors now better positioned to influence pricing.

The rental multifamily market would benefit from tightened lending practices in the residential sector, with renters in the 19 to 35-year range expected to expand by 3.2 million over the next four years, pushing up demand for apartments. The industrial market was also benefiting from expanding global trade.

In the retail sector, demand for space would be weak in the short-term providing value-added opportunities to upgrade tenant quality and mix. The sector was expected to recover by 2010. Returns in the hotel sector could also be at risk in a recession, the report said, but upscale and luxury developments were expected to out perform other segments of the industry over the next three years.

Mexico was also highlighted as a key investment opportunity, particularly in the residential arena with the country’s housing market expected to be the fastest growing real estate sector over a five-year period. In the US, Seattle, San Francisco, Denver, Salt Lake City, Dallas and Houston were all earmarked for expansion owing to strong high-tech, energy and manufacturing industries.