Phase Three Drawdown: When Every Major City Started Bleeding at Once
This is post 4 in my series on The Commercial Real Estate Tsunami: A Survival Guide for Lenders, Owners, Buyers, and Brokers by Tony Wood, with a foreword by Matthew Anderson (ISBN: 978-0-470-63637-4, published by John Wiley & Sons, 2010). Chapter 3 is called “Phase Three: Drawdown” and it covers what was happening in 2009 across major U.S. metro markets. If the earlier chapters were about warning signs, this one is the hard data proving the warnings were right.
Previous post: Phase Two: Amplification
What Is the Drawdown Phase?
In a real tsunami, the drawdown is that eerie moment when the water pulls back from the shore right before the big wave hits. It looks calm. But it’s actually the last warning you’re going to get.
Wood uses this as the perfect comparison for what was happening in commercial real estate in 2009. The numbers were pulling back everywhere. Sales volume was dropping. Vacancy rates were climbing. Rents were falling. And this was happening in every major city, in every property type. Not just one bad market. All of them.
The Data Tells the Story
This chapter leans heavily on data from CoStar Group, which is basically the gold standard for commercial real estate analytics. At the time, CoStar’s database covered 3.2 million properties with nearly 65 billion square feet of space. Over $1 trillion in listed property value. So this wasn’t some small sample size.
Wood goes through the data for 12 major metro markets across the country:
- Phoenix, Arizona
- Los Angeles-Orange County, California
- Sacramento, California
- San Francisco, California
- Denver, Colorado
- Orlando, Florida
- Atlanta, Georgia
- Chicago, Illinois
- Las Vegas, Nevada
- New York City, New York
- Portland, Oregon
- Dallas-Fort Worth, Texas
And the story is the same in every single one. Vacancy rates going up. Rental rates going down. Sales volume collapsing. The consistency is actually the scariest part. It wasn’t like Phoenix was struggling while New York was fine. Everyone was getting hit.
No Property Type Was Safe
One thing Wood makes clear is that this wave wasn’t going to spare any particular property type. Office buildings, retail spaces, hotels, industrial properties, and even multifamily housing were all showing the same patterns.
Office and retail were the obvious victims. When businesses close and people stop shopping, office towers and malls empty out. That’s straightforward cause and effect.
But Wood points out that industrial and multifamily weren’t going to escape either. The economic conditions combined with the debt maturity problems were going to hit everything. And that meant the old rules for valuing commercial properties were becoming less reliable. You couldn’t just apply the same formulas you’d been using for 30 years and expect accurate results.
Each property and each market was going to need its own individual evaluation. The cookie-cutter approach to commercial real estate valuation was dead.
The Markets That Boomed the Hardest Would Fall the Hardest
Matthew Anderson from Foresight Analytics offered a simple but important observation. The areas that saw the most activity during the 2006-2007 boom would naturally be the ones most at risk. Makes sense when you think about it. The places where people were making the craziest deals at peak prices were the same places where the most loans would be coming due at the worst possible time.
And the risk was spread broadly. It wasn’t just one geography or one property type. It was everywhere. The boom had been national, and so the bust would be too.
What Made This Chapter Hit Different
Here’s what I think makes Chapter 3 so effective, even though it’s mostly tables and charts. Wood isn’t making predictions here. He’s just showing you what’s already happening. City after city, the same pattern. Rising vacancy. Falling rents. Disappearing sales.
When you see that pattern repeat across Phoenix, LA, San Francisco, Denver, Orlando, Atlanta, Chicago, Las Vegas, New York, Portland, and Dallas, you stop asking “will there be a crash?” and start asking “how bad will it be?”
Wood also drops a line that stuck with me. He says commercial real estate will likely follow the same pattern as the residential sector collapse, with several waves of foreclosures before things stabilize. If you lived through the housing crisis, you know how that played out for homeowners. Now imagine that same slow-motion disaster, but with office buildings and shopping centers.
Looking Ahead
Wood wraps up by previewing the next chapter on the “Run-Up” phase. That’s when the actual wave hits and starts washing over everything. He anticipated the run-up would begin in 2010 and impact markets through 2013 or possibly longer. The numbers would be historic in terms of commercial real estate mortgage defaults and foreclosures.
The drawdown data was clear. The water had pulled way back from the shore. The question was no longer if the wave was coming. It was how much damage it would do when it arrived.
Next post: Phase Four: The Run-Up
This post is part of a series retelling The Commercial Real Estate Tsunami by Tony Wood (ISBN: 978-0-470-63637-4). All market data referenced in this chapter was sourced from CoStar Realty Information, Inc.