Commercial real estate business may look different in the future

April 24, 2009 6:35 PM
The question those involved in commercial real estate ask themselves everyday; "When will the recession end and the commercial real estate market recover?" Nationally and locally answers vary because of both the complexity of the business and the fact that no one has a crystal ball.
After 2008, armed with experience from the past, everyone entered 2009 with optimism. Now it appears that 2009 will be a write-off.
So, will the economy recover in 2010 or 2011? As a lagging industry, one that lags the rest of the business sectors by as much as a year, does that imply commercial real estate will recover in 2011 or 2012?
One thing is for sure, this recession has left no sector of our economy unscathed. The consumer, corporate America and the real estate lending markets have been equally bludgeoned. Whether it is a year or two or three, it is going to take a long time to get back to "normal", however that word will be redefined in the future.
It appears as though the commercial real estate business as it has been known it in the past, will look a lot different in the future. Just as the business changed after the savings and loan crisis of the early '90's, a "new" commercial real estate business will emerge once the government has settled in on a new direction for the economy and the banking business. After all, it is very difficult to "lag" behind something that is as fluid as the current economy.
According to estimates from The MIT Center for Real Estate, average prices for commercial properties nationally have dropped 22 percent from their peak in 2007.
Although the numbers for southern New England do not appear to be as dramatic, the continued scarcity of debt financing, weakening real estate fundamentals (increasing vacancies) and more stringent underwriting criteria by the lenders are creating further downward pressure on values. While watching values continue to fall, even well capitalized investors are content to remain on the sidelines and wait for the market to hit bottom.
That "bottom" is a murky and elusive concept.
Eventually, the combination of weakening real estate fundamentals, falling property values, and a wave of upcoming loan maturities will result in a significant uptick in asset sales at prices required to attract investors. A new commercial real estate business will emerge that will be defined by new tax laws, new lending guidelines for financial institutions and new investment alternatives that have been shaped by the fall-out in the global marketplace.
Thereafter, a fresh new approach to building wealth in real estate will again emerge.
For the past two hundred years, fortunes have been made and lost in the commercial real estate business in the United States. Once again, as in previous real estate cycles, the markets will adjust and will turn around. Opportunities will abound and the new "Commercial Real Estate Business" will begin.
As to when all of this will occur — that's a different question.