Good News, Bad News

The good news?  Commercial real estate might be -- might be -- turning around.  The bad news?  The initial rate of empty office space was much worse than we thought.  The problem is "shadow inventory" in commercial office space:  empty cubicles from downsized employees whose jobs aren't coming back.  And there's a lot of it out there.

First, there's all that shadow inventory CoStar tracked, which if you add it all up equals 420 million square feet of empty desks across America. That's nearly the size of all the office space in New York City, according to Florance, and then there's the issue of still-low rents.

"The last two years’ rapid increases in the office vacancy rate have moderated substantially," agrees Sam Chandan, chief economist at Real Capital Analytics. "Still, we should not expect a sustained and consistent improvement in occupancy until office-using employment reverses deep losses. Even in that case, lease rollovers in the office sector will remain dilutive to property cash — i.e. new leases are being signed at lower rates than the leases that are expiring — for some time yet."

In other words, it ain't over 'til it's over.

Commercial mortgage debt is still in deep trouble, when you consider properties bought at the top of the market in 2007.

There will still be big losses there, but perhaps this turn in the office sector is a preliminary sign of recovery in other sectors as well.

It all comes back to jobs.

The unemployment rate has a direct effect on commercial real estate.  Commercial real estate in turn has a direct effect on the bottom line of businesses.  That in turn causes businesses to look towards cutting costs by reducing hours and personnel...raising the unemployment rate.  It's a nasty circle that's going to require effort of will and more importantly effort of Congress to break.