Commercial Real Estate Fundamentals Deteriorate Rapidly

The apartment vacancy rate for the top 79 US markets jumped to an average 7.2%, a full percentage point increase over the past two quarters and the highest level since the first quarter of 2004, according to Reis Inc, a New York real estate research firm. Asking rents, which exclude concessions fell 0.6%, while effective rents declined 1.1% in the first quarter. Among CMBS, the multifamily sector posted the highest delinquency rate in February, reaching 3.3%, from 3% in January, according to S&P. Some $3.2 billion in multifamily debt was delinquent in February, up from $1.5 billion in the third quarter of 2008. Yikes.

Meanwhile, over in the retail sector, conditions aren’t much better. The amount of occupied space in US shopping centers and malls declined a net 8.7 million square feet in the first quarter of 2009. The amount of occupied space lost in that one quarter was more than the total amount of space retailers gave back to landlords in all of 2008 and any other year in recent history. The decline in occupied space pushed the vacancy rate for malls and shopping centers to 9.1% in the first quarter from 8.3% in the previous quarter. It is now the highest rate since the 1990s. Mall lease rates slid 1.2% and those at shopping centers (think strip malls) fell 1.8%.

It’s no wonder that the REITs were pummeled in yesterday’s trading session. Not only are things bad for the nation’s landlords, but they’re getting worse at a faster rate. Optimistic REIT investors have piled into the stocks in recent weeks, eager to snap up shares in secondary offerings despite the fact that most REITs carry significant debt loads and are opting to pay dividends in stock rather than cash. Personally, I like my dividends paid in cold hard cash, and prefer that any stock I purchase in the middle of the worst credit crisis since the Great Depression to have a debt to equity ratio below 0.5, instead of, say, 6.9 (i.e. SPG.)