Commercial break | Timing and circumstances color the commercial real estate market
Commercial real estate continues its rocky ride in tandem with a turbulent economy, leading some industry professionals to hail opportunities while others caution a more measured approach.
Low interest rates and the amount of inventory in the market have combined to make this an excellent time to buy into commercial real estate, according to John Southard, principal of CB Richard Ellis Economic Advisors. A presenter at a recent market forecast breakfast sponsored by CB Richard Ellis/The Boulos Co. and Perkins Thompson, Southard says the economy hasn’t yet hit rock bottom, but is on course to level off sometime in the next year before growing again.
“If we think of the recovery as U-shaped, we’re heading into the first curve of the U,” he says.
Once the market stabilizes, Southard says, the length of time the market is in the “leveling off” phase before its upturn depends on a number of factors. Among these are value changes and income from owned properties. The unpredictable X-factor that will determine that time frame will depend on buyers’ and lenders’ willingness to get back into commercial real estate.
“Real estate is a sector that moves slowly … If you wait for rent growth to hit bottom, values may already be on the rise,” he says. “It all comes down to whether there will be enough confidence that people will jump in and invest in commercial real estate. All the market is missing right now is that liquidity.”
According to economist Ken Simonson, who tracks realty markets for the Associated General Contractors of America, commercial real estate across the country continues to weaken. In his Oct. 26 Data Digest, he cites businesses’ inability to obtain credit to build or buy commercial space as a significant factor in the malaise of that sector.
Credit will be key in commercial real estate’s ability to revitalize, says Frank O’Connor of NAI The Dunham Group. Up to a billion dollars in conduit loans — loans that were made with the intent of breaking them up and selling them as securities — will come due in the next couple of years. Because the market for those loans evaporated last year, property owners will need to refinance mortgages conventionally — at much higher rates — or sell their properties for a fraction of what they owe on them. Either way, the market will soon see a glut of properties, O’Connor predicts.
“With the amount of inventory coming online and the inability to finance properties, if buyers are patient, they’re going to get their best deal in a couple of years, probably not today,” he says.
To illustrate his point, O’Connor points to the former Blue Cross-Blue Shield building on Free Street in Portland. After being purchased by Trammell Crow in June 2007 (at commercial real estate’s peak) for $8 million, the property sat vacant for two years before it was sold in August for $3.5 million — a third of what was owed on it. So while it may be a buyer’s market, O’Connor says, in order to enter it, you have to have capital.
“Cash is king, especially if you can find a bank foreclosure or get the seller to agree to a reasonable sale price,” he says. “If you have cash, it may be a good time to buy, but I’m telling my clients to keep their powder dry because of the high cap rates we’re seeing.”
Making careful choices
Kevin Fletcher of Coldwell Banker Millett Realty in Auburn is cautiously optimistic about a rebounding commercial real estate market, but adheres to one caveat: Buyers have to find the right kind of property before investing.
“For cash flow-producing, stable properties, I don’t think those performing assets, relatively speaking, can get much better. For those properties, the next three to six months are going to be golden,” he says. “But non-performing, non-cash flow-producing properties haven’t hit bottom yet, and the market is inundated with these vacant properties.”
Fletcher says his optimism is fueled by low interest rates. However, there is immediacy to investing in commercial real estate. As inflation rises, so too, will those low interest rates.
“The next three to six months are going to be ideal for those cash flow-producing properties,” he says. “Right now, interest rates are very low, so even if property values drop as much as 10%, you’re still going to be able to get more for your borrowed money.
“But if you wait too long,” he adds, “your return is going to take a hit.”
If there’s any consolation among Maine’s commercial real estate brokers, it’s that Maine isn’t taking it on the chin nearly as hard as other states. Tony McDonald of CB Richard Ellis/The Boulos Co. says Portland is a safer bet when it comes to commercial real estate, compared with larger markets in the country. Vacancy rates in and around the city are less than half those in New York and Boston, and the range between highs and lows in those rates is much lower as well.
“We just don’t have those up and down spikes, so from an investor perspective, it’s a relatively stable market,” McDonald says. “It may not be a home run market, but they don’t get crushed like they did in the ‘90s.”
This holds true not just for Portland, but for most of the state, O’Connor says. “Maine has always been a flatline state, so while things may seem bad right now, we’re fortunate in that respect,” he says.
Despite low vacancy rates in relation to the rest of the country, rates in Portland are rising, creating a renters’ market in which tenants are aggressively seeking to renegotiate leases rather than move their offices to another building.
“With more space on the market, tenants have a lot of leverage with landlords,” O’Connor says. “Besides rent reductions, tenants are also looking for — and getting — concessions from their landlords,” such as lower lease rates.
Inflation is another factor that has negatively impacted the rental market for owners. Because of this, O’Connor says, landlords have to be extremely cautious when entering into and renegotiating leases.
“The way we’re spending money as a country is going to push inflation through the roof, so you have to look at what’s coming down the road,” he says. “Basically, that means if you’re signing long-term flat leases, which is what tenants are looking for, inflation is going to take all the value from the rent you’re getting.”
O’Connor says he does see a light at the end of this tunnel. “The bottom is looming, and we should hit it sometime in the next two years,” he says. “After that, there’s no place to go but up.”
McDonald and Southard see an even shorter rebound. At the market forecast breakfast, Southard predicted the recession will officially end this quarter — a driving factor for the impending commercial real estate turnaround. With low interest rates, stabilizing jobless numbers, plenty of available debt, a dollar that is attractive to exporters and an improving economy that coincides with a low point in the commercial real estate market, McDonald and Southard say there will be tremendous opportunities in 2010.
“This is a great time to buy, even without a ‘fire sale’ mentality,” McDonald said. “You make your money when you buy, and over the next 12 months, it’s going to be a great time to buy.”
Derek Rice, a writer based in Saco, can be reached at editorial@mainebiz.biz.
Mainebiz web partners
Most Recent
Most Recent
Comments