From his 30th-floor Center City office, William J. Hirschfeld has an in-your-face reminder that all is not well in commercial real estate.
His view is of One Liberty Place, the 61-story premier office address that, to the casual observer, is a glistening marvel. To Hirschfeld, it's also a constant prod that he's "gotta make the doughnuts."
That means finding a tenant for the 54th floor, a spectacular space that, despite pulse-quickening views, Hirschfeld, as One Liberty's leasing manager, has had no luck filling since Cigna moved out three years ago.
It's just a hint of the harrowing state of affairs in commercial real estate, where vacancies are on the rise across virtually all sectors, rents and property values are dropping, building owners are low on funds, and financing options are drying up.
And bad as things are, they're expected to get worse - the next slide in the snowballing economic crisis that began with the collapse of the housing market and continues to claim casualties.
"There's a tremendous amount of pain coming," declared Sid Smith, managing partner of the regional office of Newmark Knight Frank Smith Mack, a global real estate services firm.
There's plenty of pain already, and abundant evidence that economic suffering is as contagious as flu in the workplace:
The office market is faring the worst, a direct result of layoffs and the shuttering of businesses altogether. At the close of the third quarter, the office-vacancy rate in the Pennsylvania suburbs was 18.4 percent; in South Jersey, 16.1 percent; in downtown Philadelphia, 12.6 percent, according to data from Grubb & Ellis Co., a national commercial real estate services company. For the combined region including Wilmington, the rate was 16.3 percent, slightly better than the national rate of 17.1 percent, which Grubb & Ellis attributed to the diversity of this area's economy and a lack of overbuilding before the recession started.
Those who have lost jobs or fear losing them are shopping less. That, in turn, has led to retailers' going out of business or pulling back on expansion plans, leaving empty storefronts in shopping centers and on Main Streets, and vacant big-box hulks. The region's retail-vacancy rate is put at 8.3 percent.
With shopping down, so is a lot of manufacturing and the need for stockpiling inventory, thus creating vacancies in warehouses and other industrial spaces.
Multifamily commercial properties (apartment and condo buildings) don't have a lot to crow about, either: Vacancies have been on a gradual climb there, too, currently about 8 percent in this market. Some reasons: unemployment (young people aren't leaving home, for instance) and abundant now-less-expensive homes for sale.
All this empty commercial space is driving down rents, creating a capital-flow problem for the landlords who can least afford it - those with debt coming due. Of the $3.5 trillion in outstanding commercial debt, an estimated $535 billion will mature over the next two years, according to Marcus & Millichap, a national commercial real estate brokerage firm.
Property values are down as well, as much as 40 percent since October 2007, the most recent peak. Those drops contributed to the bankruptcy filing last month by Capmark Financial Group Inc., a commercial-property lender in Horsham that wound up owing more to its own creditors than its loans were worth.
As fortunes in commercial real estate have worsened, a new trend has emerged: Tenants are scrutinizing the creditworthiness of landlords.
Smith, of Newmark Knight Frank Smith Mack, said that was "something we spend more time on than we ever had in the past."
"Today, it's one of the first questions you ask," he said. "You want to know the capitalization of the landlords, can they meet their obligations. The landlords fortunate to have capital are making leases."
But who will be well-capitalized is a bit of an unknown.
Commercial real estate "is going through a whole regime change in terms of financing," said Tim Schiller, a senior economic analyst at the Federal Reserve Bank of Philadelphia. "There's going to be less lending into this industry and requirements for more owners' capital."
For instance, a property bought in 2005 for $10 million with a $7 million mortgage now might be valued at $6 million, said Steve Blank, a senior fellow in finance at the Washington-based Urban Land Institute.
"Now, you go into the bank to refinance the existing loan," Blank said, "and the bank says, 'We can only give you 60 percent loan-to-value.' Sixty percent times six million is $3.6 million."
With the bank willing to refinance only $3.6 million of the original $7 million mortgage, that leaves a stomach-churning gap of $3.4 million.
"How does that gap get closed?" Blank asked. "Will the owner decide to put more money into the property? Will the bank accept a lower-than-full payoff? These are the imponderables."
Some analysts estimate the credit crisis has driven $138 billion worth of U.S. commercial properties into default, debt restructuring, or foreclosure.
Not that lenders are eager to go with the most severe option: taking possession of property.
"It's just not so easy for the banks to go into foreclosure mode," Blank said. "One of the reasons is they need to have income or equity before they can take the losses."
With more than 100 bank failures so far this year, Blank said his guess was that for at least the short term, lenders will opt for a "pretend-and-extend" strategy - settling, perhaps, for payment of interest for a time.
"Everyone is going to try to get through this by kicking the can down the road for a while," he said.
Because commercial real estate is a lagging indicator, recovery is not expected until at least three to six months after the economy shows signs of growth. Meanwhile, more office vacancies are coming.
The recent merger of pharmaceutical heavyweights Pfizer Inc. and Wyeth will result in the closing of Wyeth's Great Valley campus next year. The 87-acre site consists of two buildings with a combined 529,000 square feet.
In Center City, a big question mark is what will become of the 160,000-square-foot Rohm & Haas Co. headquarters on Independence Mall in the wake of the company's acquisition by Dow Chemical Co.
What those properties don't have going for them is "trophy" status like One Liberty Place does.
"Trophy" is the top subsector of the highest class of office building. Compared to the rest of the office sector, it is performing well, said Hirschfeld, One Liberty's leasing agent and senior director at Cushman & Wakefield of Pennsylvania Inc.
One Liberty's crisis years were 2005 to 2007, when it was 42 percent vacant compared with 9 percent today. Asking rent then was $28 to $30 a square foot, plus electric; today, it's $36 to $38 a square foot, plus electric.
On a recent sun-soaked afternoon at One Liberty's bare 54th floor, Hirschfeld was upbeat. He noted that few buildings in the city offered such spellbinding views: the Schuylkill and Delaware River, the Ben Franklin Bridge, William Penn atop City Hall, the soaring Comcast Tower.
"We have prospects," Hirschfeld said. "Whether we're going to do a deal very soon, who knows?"
Go to http://go.philly.com/commercial for more Inquirer coverage of the region's commercial real estate market.
Contact staff writer Diane Mastrull at 215-854-2466 or firstname.lastname@example.org.