A good indicator of what lies ahead for commercial real estate and its exchange traded funds (ETFs) is the status of this market in Cleveland and Detroit.
As with the housing real estate industry, there isn’t much of the country that will be spared from a downturn. Cleveland and Detroit just happen to be the first ones to feel the stress. These two metropolitan areas lead the country in mortgage delinquencies for owners of office buildings, apartments, malls and warehouses. On top of this, properties with mortgage payments that are 60 days late or more rose to 3.93% and 3.75%, in Cleveland and Detroit respectively, states Brian Louis of Bloomberg.
CB Richard Ellis reports that office vacancy rates in Cleveland hit 14.8% in 2008 and in Detroit was at a whopping 22%. What makes it even worse, is that forecasters estimate that these numbers will significantly increase in 2009.
Cleveland and Detroit aren’t the only ones getting hammered. In fact, Standard & Poor’s states that the North American commercial property delinquency rate is currently at 1.1%. The next areas to be hit hard are the ones that took a bath in the housing real estate market. Some of these cities include Las Vegas, Phoenix, parts of Florida and the Riverside-San Bernardino portion of California.
The reason why the commercial real estate market is in trouble is lack of demand, which is being caused by surging unemployment rates, rising home foreclosures and increasing defaults on commercial loans that were packaged in such a way which included an increase in future rental rates and revenue.
All we can hope for is a solution to aid our ailing economy. Some ETFs that have taken a hit are:
- iShares FTSE Industrial/Office Index (FIO): down 15.5% for the last three months
- Vanguard REIT Index (VNQ): down 22.2% for the last three months
- Dow Jones Wilshire REIT (RWR): down 23.6% year to date
Kevin Grewal contributed to this article.