Office Construction Is Still In A Sinkhole

Even if the economy recovers later this year, the omens suggest the recession in commercial real estate will continue. Commercial construction is already down some 40% in real terms from its 1985 peak, and McGraw-Hill Inc.'s F. W. Dodge Group reports that office building contracts plummeted in March to half of their value a year earlier.

Meanwhile, office vacancy rates are rising. While the vacancy rate averaged about 10% in central business areas of large cities during the last recession, Cushman & Wakefield Inc. reports that it hit 18.2% last quarter and is running about 21.5% in suburban markets. In cities such as Los Angeles, where the downtown vacancy rate recently jumped from 15% to 21%, the problem is exacerbated by newly completed construction.

Economists at The Bank Credit Analyst think it could take five more years for commercial construction to revive. Noting that nonperforming commercial real estate loans increased by 16% in the first quarter at both Citibank and Chase Manhattan Bank and by 46% at First Chicago, they warn that "few bankers will be able to justify increasing their commercial real estate exposure for some time to come."

Before it's here, it's on the Bloomberg Terminal.