Room At The Top And On The Lower Floors, Too

When it comes to the recession in commercial real estate, this really is a global village. Falling property values and pullbacks in real estate lending are becoming nigh-universal conditions, plaguing New York and Tokyo alike.

Worse, the only way to go is down. "Every city with a glut of office space can anticipate further drops in office-building values, as tenants complete the process of renegotiating their leases or moving to other buildings where the deal is better," says Jared Shlaes, a real estate expert in Arthur Andersen & Co.'s Chicago office. "It could easily take 20 to 25 years before we see a significant recovery in the world's office markets where there has been overbuilding."

The depth of the downturn varies from city to city, of course. But a common theme appears everywhere there's a glut: Even while the boom was waning, both speculative builders and their bankers seemed to have believed that the laws of supply and demand had been suspended.

FALLING DOWN. London, where markets are in a depression not matched since World War II, is the prime example of that phenomenon. At the darkest moment of the recession, a rash of new office space, including Olympia & York's Canary Wharf project, hung out "For Lease" signs. Rents, which soared to $120 a square foot for superprime offices in the late 1980s, have tumbled by 50%. "London is scraping along the bottom of an awful cycle," says Paul Orchard-Lisle, a senior partner of Healey & Baker, a big leasing agent. "It's a tenant's market and will remain so until 1995 or 1996 at least."

New York is another market where overbuilding, coupled with a reduction in demand from the financial-service sector, is taking a toll. Much of the job growth that led to the boom in office building has been reversed by Wall Street cutbacks. Since 1985, there has been almost a 100% rise in office vacancies citywide, a 30% to 60% drop in the value of office property, and a 25% decrease in rents, says Lloyd N. Lynford, president of REIS Reports Inc., a New York real estate data-base firm.

The future for commercial real estate in New York is dim. Although rents are dropping, the vacancy rate is still trending up, and big sales are virtually nonexistent. Michael Giliberto, head of real estate research at Salomon Brothers Inc., doesn't predict an upturn until the end of the decade. The crisis at O&Y, New York's largest commercial landlord, isn't expected to have much immediate effect. The real fallout will be seen as leases signed in the mid-1980s roll over and are renegotiated at far lower levels.

Oddly enough, the Reichmanns' fall will have little more than a psychological impact in Canada, because O&Y did most of its overreaching beyond its home turf. The market's fundamental weaknesses run far deeper. "The commercial real estate market in Canada will stay depressed for three to five years--not because of the Reichmanns, but because every major center in Canada is mverbuilt," says Brian Neysmith, president of Canadian Bond Rating Service.

BRIGHT SPOTS. The same trouble afflicts the Scandinavian countries. After spiking up in the middle and late 1980s, property values are sinking fast in cities such as Copenhagen and Stockholm, and tenant demand is shrinking.

What few bright spots there are can be found in countries that have been least burned by recession. Germany, where there are few large commercial real estate developers, "really hasn't suffered from the overbuilding in the 1980s that many other markets suffered from," notes Simon Milde, chairman of Jones Lang Wootton North America. He adds, though, that there has been slight softening in the market there. Another exception: Hong Kong, where massive building has been matched by massive growth.

For the stouthearted, one European capital has a dearth of office space and the prospect of a business boom in coming years. But only visionaries need apply: That city is Moscow.

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