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For Rent: The Ongoing Perils of Commercial Real Estate

December 29 2010

For Rent: The Ongoing Perils of Commercial Real Estate
An ABTV Industry Watch Report

As the economic recession has pummeled the overall economy, it has decimated the Commercial Real Estate industry. With the general economy showing signs of stabilizing, government, financial institutions, industries and investors have turned from handling the emergency triage of the immediate economy-threatening financial crises of the recent past to identifying and managing the crises on the horizon. While the residential real estate industry has been the poster child for the struggles of the financial markets, the Commercial Real Estate industry must now face its own challenges.

Defaults and anticipated defaults in bundled packages of residential mortgages, many with one- or two-year triggers for interest rate adjustments, were at the heart of the subprime meltdown. In 2007, with little prospect that large numbers of individual borrowers facing an interest rate increase could meet the new higher payments or refinance their mortgages, the wave of defaults and anticipated defaults of residential mortgages swept over the financial landscape and helped to trigger the financial turmoil of 2008 and 2009. Problems with securitized bundles of these single-family residential mortgage-backed securities rocked the financial markets.

These setbacks triggered the overall economic crisis that has crippled the five sectors of the Commercial Real Estate industry. The National Association of Realtors’ latest Commercial Real Estate Outlook predicts continued short-term declines in each of Commercial Real Estate’s five sectors:

Office: As businesses have reined in expenses, office vacancies have leapt and rents have plunged.
Retail: Without a consumer spending rebound, tenants suffer declining sales and rents continue to decline as vacancies increase.
Industrial: Although not hit as hard as Office and Retail, economic contraction affects the need for warehouse and manufacturing space.
Multifamily: Also not as hard hit as Office or Retail, a weakened market due to increased unemployment, rents and vacancies.
Hospitality: Although not addressed in the National Association of Realtors’ forecast, the Urban Land Institute and PricewaterhouseCoopers forecast occupancy improvements in 2010 with limited service hotels doing better than higher end properties.

Download For Rent: The Ongoing Perils of Commercial Real Estate

PDF format, 895KB, 15Pages.

Anderson Bauman Tourtellot Vos & Co.

What it Will Take to Survive
While signs of economic recovery have started to surface, it does not appear, as this report points out, that a corresponding turn in the Commercial Real Estate market will happen anytime soon.

Strategies that have been effective in the past to address previous Commercial Real Estate downturns may not work given the unique set of conditions that exist now. Unlike past slumps that were marked by high long-term interest rates, the current downturn is characterized by historically low interest rates and strict underwriting standards. Layer on the uncertainty of current economic conditions, and one can easily see that, in order to survive, new strategies must be developed.

This is a time when the Commercial Real Estate industry must take a hard, honest look at existing business conditions and cash management systems and apply resources where they can most effectively be used.

Initiatives requiring excessive outlays of financial and human capital may need to be abandoned in favor of those offering equity value, liquidity and demonstrated solid performance.

Throwing out the old rules, taking a disciplined approach to assessing current financial conditions, prioritizing resources, and making tough calls may offer the only ways this industry can survive the current economic storm.

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