Report: bottom may be here for some markets.

A decline in delinquency rates during the third quarter of 1992, coupled with falling vacancy rates, suggests that the real estate recession has finally hit bottom, according to Coopers & Lybrand.

Recent analysis of U.S. real estate conducted by Coopers & Lybrand found the decline in delinquency rates was the first following a two-year rise. In addition, the findings reveal failing vacancy rates across all property types except the office sector.

The analysis charts inventory, vacancies, delinquency rates on loan principal, and the outlook for six property types. Coopers & Lybrand prepares this survey annually as part of a program to quantify the condition of the U.S. real estate market. Data for the analysis is assembled from a variety of sources, including the American Council of Life Insurance, the Bureau of Labor Statistics, CB Commercial, Monitor Magazine, the National Association of Homebuilders, the National Association of Industrial and Office Parks, New American Network, Salomon Brothers, Smith Travel Research, and the U.S. Census Bureau.

Office

The office sector continues to suffer under the weight of massive over-building in the 1980's and low current absorption rates. Nationwide vacancy rates reached 19.6 percent in 1992, equivalent to nearly 65 square feet of vacant space per office worker. Lease rollovers will reveal additional "hidden" vacancies as companies relinquish under-utilized space. At current absorption rates, U.S. office market vacancy rates are not expected to decline to the traditional 5 percent to 6 percent range for 13 years, and recovery times may be as high as 20 years in some cities.

Retail

In contrast, retail vacancies declined by over one percentage point in 1992, to 10.8 percent. This is still double traditional rates due largely to continued new construction.

Citing increased consumer confidence, Coopers & Lybrand expects a rebound in the retail sector in the next three years. In addition, Coopers & Lybrand expects that mail and center owners' current awareness of the need to adapt to changing tastes and demographic trends is also helping to improve the long-term outlook for retail. However, retail properties will not recover evenly. Discount centers and prime retail locations continue to gain market share at the expense of traditional department stores in secondary locations.

Warehouse

Warehouse properties gained occupancy in 1992, with vacancy rates falling from 9.5 percent at the end of 1991 to 8.5 percent by the end of 1992 on approximately 4.7 billion square feet of space. Just-in-time production techniques and the continued decline of the manufacturing sector will continue to pose a challenge to this sector, but minimal additions to stock and the predominance of "build to suit" construction techniques have helped stabilize the market and bring loan default rates down 31 basis points from midyear 1992.

Hotel

For the hotel segment, Coopers & Lybrand forecasts a return to demand-supply equilibrium within two years. Positive signs include a decline in loan delinquency rates of more than 100 basis points in the third quarter of 1992 from a high of 16 percent in the second quarter, and a 1.2 point drop in vacancy rates between the fourth quarter of 1991 and the fourth quarter of 1992 to a seasonally adjusted 37.2 percent. Still, approximately 680 million square feet of hotel space remains idle, equivalent to 43 hotel rooms per night in each U.S. hotel.

Residential

By far the best news for the real estate industry is found in the residential markets. Unoccupied single family homes have fallen to just over 1 million, or 1.6 percent of the housing stock, spurring price increases and new construction. In multi-family markets, the dearth of new construction has brought vacancy rates down to 7.4 percent for 1992. Aided by pent-up household formation during the recession, Coopers & Lybrand expects multi-family real estate to fully recover by 1994.

Frankel, a partner with Shea & Gould's Construction Industry Practice Group, heads up the firm's Eastern European Building and Development Consortium (EEBDC) initiative. Shea & Gould is an international law firm with 230 attorneys and offices in New York, Washington, D.C., Miami, Los Angeles, Albany and Prague, Czechoslovakia.