By Brian Summerfield, Online Editor, REALTOR® Magazine
The next year or two may be a “test of survival” for anyone in the commercial real estate sector, but the upswing could be very lucrative for the ones who make it through that period. This was the overarching message coming from panelists and speakers at the Urban Land Institute’s Fall 2009 meeting in San Francisco last week, as well as ULI’s Emerging Trends in Real Estate 2010 report, which was released at the event.
Right now, the consensus among industry experts seems to be forming around a slower, “L-shaped” recovery in the commercial market, with employment repeatedly being cited as a key factor in determining exactly when that recovery may come. The discussion was well-timed, seeing as how the U.S. unemployment rate topped 10 percent last month, reaching levels we haven’t seen in a quarter century. Predictions as to when we’d see real job creation again ranged from late 2010 to 2012.
Employment is just as critical an issue in commercial as it is in residential, if not more so, because it affects so many parts of this industry. Many of the millions who lost their job and have been unable to find a new one have had to move in with relatives, hurting both the housing and multi-family markets. It’s safe to assume these people aren’t shopping much either, which partly explains the slump in retail. And the office and industrial sectors obviously aren’t benefitting from rising unemployment. So the “jobless recovery” is a real fear.
Other problems abound as well. Total office vacancies rates may peak close to 20 percent this year, according to Bret Wilkerson, CEO of Property and Portfolio Research. Commercial development is stagnant, and the glut in existing office and retail space ensures that it will remain so for a while, says Stephen Blank, senior resident fellow at ULI. And rents in the multifamily and office sectors aren’t going anywhere.
With all of these negative forecasts, it might not seem like there’s much to be hopeful about in commercial. But the companies that can survive might be able to take advantage of a turnaround in just a few short years, especially if the unemployment rate falls next year. “Whoever’s left standing will be in a great position,” Blank said. “2011 could be a great year for people with investment dollars.”
The rebound of the real estate investment trusts (REITs) may also be a catalyst for a broad recovery in commercial, he added. “REITs have recapitalized and stabilized,” Blank explained. “If they continue to have access to the capital markets, they’ll help commercial recover.”
A panel of experts that included representatives from the Hass School of Business at the University of California, Berkeley, and RREEF Alternative Investments predicted that the best places for commercial real estate over the next few years would include markets with thriving tech industries and large coastal cities (particularly New York). The worst locations for commercial would be anything in depressed Rust Belt cities such as Detroit and Cleveland and many Sun Belt cities in Florida and the Southwest (especially in the office sector).
What moves do you see for the commercial market in the next few years? Up, down, or sideways? Let us know.