Good news for business owners â€“ bad news for property developers. The global credit crunch is now taking a bite of office lease rents. The mortgage meltdown is finally reaching its tentacles into commercial real estate both in the US and in the UK.
Several office transactions have fallen through because of the tightened credit markets and the rising cost of debt. What a deadly combination. We now live in a different world, both us consumers and as investors. Previously, it was a virtuous circle of freely availably credit; that has passed. Now, the main driver behind the reduction in availability of debt is the fears of a long-lasting recession paired with high inflation rates across the globe.
Although we are bound to see some further deterioration, as more and more construction projects are having trouble raising finance and building deals are literally falling apart, analysts agree that this is just part of the economic cycles that financial markets go through.
Itâ€™s obvious that consumers are not yet persuaded that prices have bottomed out, although commercial properties such as offices, warehouses, and shops have already lost 18% of their value in the last year, according to Investment Property Databank Ltd.
Rent prices have dropped in the City, Londonâ€™s main financial district, in May by 1.3%. Rents should be expected to bottom out when banks and other financial institutions in the City of London are done with their staff reduction plans, that will obviously reduce demand for office space and buildings.
On the other hand, this will trigger a further rise in unemployment and another blow to consumerâ€™s confidence making it highly unlikely for home sales volumes to improve this year.