Metro Business

Commercial real estate lenders gained pricing guidance recently as new commercial mortgage-backed securities traded for the first time since Sept. 11, according to the Barron's/John B. Levy Co. National Mortgage Survey.

Interest-rate floors are in effect, but at lower levels than last month, now ranging from 6.25 percent to 7 percent for 10-year loans. Money is plentiful, but lenders are cautious, given the economic and political uncertainty facing our country.

While the winds of recession have been blowing for some time, the events of Sept. 11 upgraded its status to at least an economic tropical storm. To be sure, the economic outlook is bleak, as lackluster spending by thrifty consumers has combined with unprecedented layoffs in the service and airline industries. Real estate property owners are bracing for a recession, but, more immediately, they are facing increased costs related to insuring their buildings.

Learning about insurance

Real estate investors and commercial mortgage-backed securities buyers are learning more about insurance and re-insurance than they ever dreamed possible. Although primary and re-insurance companies will absorb more than $50 billion in losses related to Sept. 11, property owners nationwide can expect to bear the cost through future premium increases. Some preliminary estimates put the increases at 30 percent to 50 percent for office properties.

Earlier in the year, Richmond real estate participants were voyeurs observing the sensational mess wrought by the fall of technology-related companies in other markets, such as San Francisco, Northern Virginia and Seattle. Local observers had a sense of security that it won't happen here. Unfortunately, the malaise has grown and now Richmond finds itself pondering the depth of the current real estate slowdown.

Vacancy rate could rise

No place is this more evident than in the western suburban office markets, where there is more than 600,000 square feet of sublease space available for rent, according to Matt Davidson of Insignia Thalhimer. Combined with regular to-be-leased office space and projected deliveries of newly available space, the office sector is facing a potential vacancy rate that is an eye-popping 15 percent. The sublease space hanging over the market has created an obstacle for lenders and owners that want to hang on to a more palatable 5 percent vacancy rate.

Steve Gentil of Grubb & Ellis/Harrison and Bates has noted the increase in sublease space as well. He comments that, "The sub-landlords (corporate America) will take a disproportionate amount of the financial beating in this real estate recession."

Situation different

Indeed, Richmond's situation is different, unlike tech-wreck markets where weak credit tenants overleased space only to throw it back on the market as sublease space. The sub-landlords are huge corporate names like EDS, Bank of America, WorldCom, Georgia Pacific, Circuit City and Columbia Gas.

The bottom line is property owners shouldn't face the extent of interrupted cash flow witnessed in other markets. Their challenge will be to increase or hold rental rates constant against the backdrop of significant sublease space.