As the Economy Stabilizes, Will Commercial Real Estate Markets Worsen? Improve? Maybe Worsen?


Amid continued economic challenges experienced by companies;  individual consumers and families;  federal, state, and local governments; and considering the present concerns over destabilized economies in the European Union, the U.S. economy continues to show signs that it may be slowly heading toward stabilization. 

Experts say the recession has bottomed out.  Economists tell us that, technically speaking, it ended over a year ago.

 

Really Good News

Treasury Secretary Timothy Geithner, on NBC’s Meet the Press, recently said the economy is growing faster than the Obama administration expected.

At a recent meeting in New Jersey of Financial Executives International (“FEI”), Robert DiClemente, U.S. Economist at Citigroup said:

  • “We’re finally seeing job growth!”
  • “200k to 300k job losses to 125k new jobs in the month of March”
  • “44% of people who are unemployed have been out of work for at least six months”


In fact, in May 410,000 jobs were created across the United States!  A lot of other very positive news is consistently being delivered.

Some retailers are reporting marked increases in revenue and are beginning to increase inventories, with manufacturers getting in gear to support them.  In certain industries,  executives are going back to work.  Logistics and shipping industries report steady increases in orders.  Other industries are reporting consistent month over month revenue gains…not huges gains, but increasing nonetheless.

New housing starts have been up across the country.  In certain areas, like Manhattan, residential sales are on the upswing.  And, New York City commercial real estate leasing and sale transactions are purported to be picking up speed at a pace that caused GlobeSt.com, the commercial real estate information source, to recently report that “Leasing activity and investment sales across Manhattan are up sharply year-over-year…”

In commercial real estate investing, capital and credit have begun to loosen a bit, despite word of recent pull-backs by some east coast community banks.  More buyers and sellers of commercial properties appear to be going to contract.  An increasing number of sale transactions are beginning to close.  Transactions are beginning to occur both in traditional buyer / seller transactions, and as a result of banks seeking to sell both foreclosed properties and those that they’ve taken back through other actions.

 

Continued Challenges Call for Cautious Optimism

Despite the good news above, could negative events derail a recovery?  Banks selling commercial properties at discounts to market could cause real estate markets to gain ground through increased transaction volume and lending activity, while creating a further decline in already significantly depressed values.

With commercial real estate lenders seeking to off-load foreclosed properties, investors are making very aggressive, low-cost bids.  In more than a few cases, banks are acquiescing to such offers in the interest of moving those properties out of their defaulted loan portfolios.  The market expects this trend to continue.

So, as the volume of foreclosed sale transactions increases, the overall value of commercial real estate, negatively impacted by properties sold by lenders at significant discounts, will likely continue to decline…at least, for a while.  

So, at the same time, commercial real estate markets could experience increases in sale transactions with declines in value.  It is reasonable to assume that as bank pipelines of foreclosed properties empty and the volume of low-priced lender inspired transactions subsides, prices would then stabilize and begin to rise.  But, when will that happen? 

In a recent television interview, Andrew Florence, President of CoStar, was quoted as saying:  “$1.4 trillion in commercial mortgage debt will expire in the next few years.”

With this much debt expiring and being replaced with mortgages at lower loan-to-value ratios based on lower valuations, how long will it be before commercial real estate prices begin to firm up again?  How many billions of dollars in value could be lost until then? 

Could such significant declines in value create a second wave of unstable properties?  Could this just be a hungry monster that perpetuates its need for greater declines?  Could that next wave cause a stall in other sale activity?  Could it have a greater negative affect on the global economy?

What do you think?

Wishing you much success and profits!

Regards,

Follow me at http://www.Twitter.com/RealStrat

Visit Real Estate Strategies Corporation at www.RealStrat.com

Check out the Executive’s Guide to Understanding Corporate Real Estate Transactions at www.TheExecutivesGuide.com

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

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THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

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