Three Cheers for Pessimism!

Is the commercial real estate market too optimistic?

Talk with some of the market’s pros—including top executives and brokers—and you will quickly encounter a common refrain: Things are bad, sure, but they’re getting better. “What we’re seeing is much more activity and interest,” said an exec this month at one of New York’s biggest brokerages.

But the evidence is scant and almost always anecdotal, and the statements of confidence usually bland and noncommittal. For now, the numbers on the ground suggest rising vacancy rates, dwindling rents and very little in the way of big-time property sales.

They also suggest the worst is yet to come.

Pick your stat, pick your market part. In a report earlier this month, Jones Lang LaSalle predicted a 20-percent-plus vacancy rate in Lower Manhattan within the next three years; the same report saw average rents there dropping to near $30 a foot. Research from Real Capital Analytics shows that the top five sellers in Manhattan traded a grand total of $1.071 billion in commercial property during the first quarter of this year, less than during the same period last year, and a total weirdly buoyed by the New York Times Company’s sale-leaseback of a part of its Eighth Avenue headquarters—no Masters of the Universe sales here.

It should be noted, too, that some of the same commercial execs and brokers sounding positive tunes about the market now were either mum or actively participating in the heady run-up to the crash, when highly leveraged deals were highly praised. (Some, of course, were more sober and sounded alarm bells—which were promptly ignored.)

None but the most morose would think the local commercial market won’t recover, though only the most irrepressible would expect a return to a 2007-like market of $180-a-foot office rents and multiple $1 billion building deals.

But the numbers suggest a complete write-off of 2009, when it’s not yet half over, and a 2010 that may very well be only prologue to the market’s roughest times. (Another stat, after all: the Deutsche Bank report from late April predicting a $410 billion nationwide refinancing crunch that will undoubtedly ensnare several top-flight Manhattan properties. That crunch is not expected to manifest fully itself until 2010.)

One wonders at the staggering optimism, then, of some in the industry. It begs the question, going forward: Can’t we be a little more pessimistic and, therefore, more cautious in the next heady go-round? Three Cheers for Pessimism!