Taunted with signs of recovery and improving economic stability we now stand on the brink of yet another real estate disaster. This time our commercial sector prepares for dark times, but will it prove as colossal as the housing crisis?
Our looming situation comes as no surprise to many and has been inevitably following on the coat tails of our current recession. Speculating arguments have surfaced regarding the severity of our commercial real estate downturn. For a better grasp of how the commercial sector will affect our national economy lets examine some expert opinions.
Turning to professional real estate writer Mark Heschmeyer, of CoStar group, for more evidence of what we can expect out of the commercial market, I find few optimistic views. After analyzing feedback from CoStar surveys Mark concludes that the worst blows might have already hit us- smashing!-, but commercial real estate will drag the recession out longer and could possibly deliver a knockout punch. Although this seems like a contradictory comment, there is truth to it. And yes, a knockout punch sounds unnecessarily ominous, but its shock factor is undeniable.
Lets consider the main reasons why this write up believes there is no end in sight to the commercial crisis. Reason one: federal initiatives are prolonging the hurt by artificially propping up banks' troubled real estate assets. Reason two: maturing debt loads and rising loan defaults will continue to keep property values and deals down for a long time. Reason three: Consumer spending is weak and continues to fall because of deteriorating net worth in home values and rising unemployment, and reason four: all of there factors are continuing to hurt property fundamentals, and will likely continue to do so until real growth returns, which is not in sight.
Government and business continue their finger pointing with accusations of incompetence. I think the sooner that these two bickering siblings realize they need each other the sooner prosperity and progress will be achieved. However I agree with the article, that as long as the government pumps money into financial institutions it is only a façade of actual recovery. Banks need to lend money again in order to booster economic activity, but even with the aid money, loan requirement are too demanding on businesses. We will only be able to accurately gauge our economic stability and progress once the government takes off the training wheels. To paraphrase Tim Knight, when the dot.Gov bubble bursts it's going to make the dot.com and housing bubbles look like a hiccup.
Debt. It’s all about debt. Lenders gave loans on assets that unfortunately are no longer worth today what they were two years ago. Many mortgages are worth more than the actual asset used to secure the debt. This over valuation of the asset crippled lenders because they are now taking losses instead of turning profits. Trillions of dollars just evaporated. Lenders are unwilling to refinance and until they come to grips with inevitable losses we will continue to see a stale market. More than one trillion dollars in commercial real estate loans will mature within the next three years and without a plan on how to refinance it and balance the books, we could be looking at some hard times. A creative way that sellers of property can help potential buyers secure a loan is by offering the seller carry back loan. This would classify as a junior loan, second in line after the primary loan, but it can be extremely helpful to buyers and sellers.
While this article touts weak consumerism, I for one still like to believe we live in America, where consumerism is what we do best. But don’t take it from me, major retailers Apple, Khols, Starbucks, and Target have all opened up new stores this year and continue to purchase new buildings, expand, and cancel previously scheduled store closings. Leasing and Investment activity have increased and the retail market is on the rise. Retail is a different beast than office. The office market usually lags about 12-18 months behind the national economy because of the leasing structure and amount of space needed to accommodate more employees. Retail will always bounce back first. Home values have mostly bottomed out and national unemployment appears to have reached its peak, from 9.7%in June and July to 9.5% in September. While the unemployment rate might still remain high for the next few months, I believe we will not witness any more spikes or major job loss.
To quote Steven D. Sandler, CEO of Crosswind Capital LLC in Rye, NY, “The system is still too much of a cauldron of bad debt, soon-to-be bad debt, nonexistent credit availability and weak employment drivers.” The prognosis for our impeding ill economy does not look bright given all these factors. Ben Bernanke can’t even seem to fully convince himself, and the rest of the country for that matter, that we are climbing out of this dark, credit-void pit (see my last post). But where you find hard times you will also find opportunity.
Many landlords are facing high vacancy rates and are willing to make deals in order to keep their occupancy levels up. This is the best time for tenants to renegotiate with their landlords or use these low offers as leverage when looking for a new space. There are not only opportunities for tenants right now but for developers as well.
Although the construction aspect for the commercial market has looked dim and will continue to look so for a while, local governments pockets are hurting from the halt in development. With no new developments, municipalities have lowered certain building requirements in order to kick start economic growth, and their tax collections. Projects that have been rejected in the past are now passing. Now is the perfect time to entitle property.
Prices for office buildings have dropped, and will continue to do so for the immediate future. What we should look forward to is that the low price of office space will soon be exhausted sparking more construction and more growth throughout the nation.
