The Economic Shift & Its Impact on Local Commercial Real Estate
May 06 Filed under: Bob's Commercial Corner, Investor Interests, Related Articles
Written by Robert J. Starrett, CRB
There is no doubt that the shift in the national economy is slowly trickling down and impacting local commercial real estate values. Overall, the uncertainty of the financial world and the perception of personal wealth and well-being have created a less optimistic view about values. Simply stated motivations have changed. But there are opportunities, if you know where to look.
Historically, trends and changes in the commercial real estate marketplace lag behind what the residential marketplace experiences by eighteen to twenty-four months. The residential market saw the beginning of decline in the last quarter of 2007. Hence, we are just now beginning to feel the impact in the commercial market. But the picture of the commercial shift is more complicated than the one dimensional value contraction seen in residential values.
The commercial marketplace is segmented by what is commonly called asset classes. Asset classes are defined by the type or category of property, broadly defined as commercial buildings, lease space both retail and office, land with varying type uses, businesses and investment properties. Each of these classes is feeling the economic shift or impact differently.
The value of commercial buildings is primarily driven by one of two types of purchasers the Investors or the User-Owners. Investors seek a certain return on investment and consequently will typically pay less than the User-Owner. In today’s economic climate both are being very cautious and want to buy at or below market value. With a larger than normal inventory they are negotiating aggressively. As a consequence values are being driven downward. Overall statistics would suggest a 15% value contraction from the 2007 high mark. But bear in mind each situation is different. Buyer’s and seller’s motivations are key to their decision making.
The lease space market, both retail and office, has been hit hard. The Supply and Demand cycle, as a result of lower retail spending, over-building and efforts to control expenses, has driven down rental rates. Consequently capitalized values are lower. Occupancy rates are the lowest they have been in ten years. On a National scale some of the largest retail property owners are failing and in bankruptcy. This will further drive down values.
Land sales are almost at a standstill. In fact, many investors, retailers and developers are “land rich and money poor.” There are some great buys if someone has the financial wear-with-all to buy now and bank the land.
Business sales are brisk! Essentially, people are buying jobs. They want to control their own destiny. Anything that shows a reasonable cash flow will sell. Obtaining financing is always a challenge but the SBA is a viable option.
Investment properties are selling if priced realistically. The difficulty is that many owners purchased the properties at the highpoint in the marketplace. They are “underwater” and often owe more than they can sell it for. Investors, while accepting lower cap rates, are negotiating hard.
Contrary to much of what we hear from the national press there is plenty of money available for qualified purchasers and interests rates are at an all time low. Local banks are aggressively seeking out mortgaging opportunities.
A lot money can be made in a down market, if you know where to find the opportunities.
