DEAN GRAZIOSI: DEAN GRAZIOSI REAL ESTATE – REAL ESTATE FEED BY DEAN GRAZIOSI

The media has focused on the housing sector of the troubled real estate market because it is up close and personal.  While the decline of the commercial real estate market is not as personal as the decline in housing, it is just as devastating and likely to be around for a long time.

When you visit an office complex, or drive by a local strip mall or shop at a retail mall, you cannot help but wonder where all the tenants have gone.  These malls and empty offices are by-products of the tragic employment situation.

The commercial real estate market is dismal and not getting any better.  Investors had hoped for assistance in the financial reform package but instead feel betrayed.  For the commercial sector to gain any momentum, the residential crisis needs to improve.  The new reform package is well intended but very short sighted as the new credit scrutiny will make it even less appealing for lenders to open the credit doors and more difficult for borrowers to qualify.

Commercial property is driven by occupancy rates.  As big corporations and retailers have cut back, vacant space has erupted everywhere.  According to the National Association of Realtors (NAR):

·                     Property development has a 38% vacancy rate.

·                     Hotels are running at a 26% vacancy rate.

·                     21% of office space is vacant.

·                     21% of retail space is vacant.

·                     Industrial vacancy is 19%

·                     Multi-family properties have a 12% vacancy rate.

The NAR projects that peak vacancy rates will occur in the spring of 2011.  Moody’s reported that commercial real estate values rose 3.6 percent in May but the market is down 38 percent since its peak in 2007. 

Defaults on commercial apartment loans are at 4.6% despite the fact that tenants are plentiful because of the number of residential foreclosures.  Real Capital Analytics reports that commercial defaults will continue to rise until employment gains momentum.

Investors in commercial short sales are on the rise. Commercial short sale buyers must be prepared to carry vacant space for a minimum of two to three years.  Buyers need to understand the cost of all necessary repairs and fully understand the existing lease arrangements with tenants.  Usually the buyer can obtain permission to speak with the tenants prior to making an offer.  Investors who find tenants first are ahead of the game

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The commercial real estate crisis is making some investors rich.  Apartment dwellers are consolidating and waiting for job security.  While they wait, apartment occupancy rates are dwindling.  Struggling apartment complex owners are throwing the kitchen sink at prospective tenants offering months of free rent and never-before-considered expensive upgrades.

On the retail scene, consumer confidence is low as tight-fisted consumers wait for better employment reports.  Look around any strip mall and you will see available space.

As lenders scrambled to keep mortgages performing and began to make powerful concessions, new players arrived on the commercial real estate scene.  These lenders see opportunity.  They also see falling prices, lower exposure and potential for big gains, just like savvy investors.

With vacant space, supply has increased and prices are climbing back to fair market value.  Existing property owners cannot get out from under their debt and are helping buyers negotiate favorable concessions at new, reduced prices.

In mid August 2009, insurance companies and securities sales by the Federal Reserve have opened doors for investors looking to acquire office space, retail space or apartment buildings.  Overall, the commercial real estate market is completely different than existed just two months ago.

As equity markets rebound, speculation is that the recovery is underway and that the current availability of commercial space will soon be challenged.  New construction for commercial space is recovering slowly, leading investors and lenders to take closer looks at their commercial portfolios.

The commercial real estate market in California has been struggling to find the floor since the recession began.  Analysts like Darrell Wheeler of Maguire Properties, Inc. project that the new infusion of investment capital will spur the commercial market recovery.

“These disposition options would not have existed just two months back, so market conditions are changing very quickly,” said Wheeler.  Opportunity is knocking on commercial real estate doors.  Walk on in.

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