Don’t look for the country’s commercial real estate market to improve any time soon. In fact, expect it to continue to get worse for the next year or so. That was the conclusion from a panel at the National Association of Real Estate Editors journalism conference in Washington, D.C., that addressed the question: “Commercial Real Estate in the Obama Era: Next Domino to Fall?”
“The (other) shoe has dropped,” NAREIT president Steve Wechsler said of commercial real estate. While the public commercial real estate market of publicly traded REITs likely hit bottom in March, the remaining 90 percent of the market that is private won’t bottom out until next year.
The $6 trillion property market is split evenly between debt and equity, thanks to the explosion of securitization that occurred in the 10 years prior to the current credit crisis, said Chip Rodgers, Jr., a senior vice president of the Real Estate Roundtable. At the end of 2008, the commercial real estate industry had $3.5 trillion of outstanding debt. Ten years ago, the industry’s outstanding debt was $1.3 trillion.
Washington-based Real Estate Roundtable has a plan to help end the crisis that’s paralyzed practically all speculative development on the commercial side.
First, Rodgers said, the Term Asset-Backed Loan Facility (TALF) program needs to be expanded to include commercial mortgage based securities. Rodgers expects this to restart the securitization market.
Second, the United States needs to repeal or change tax laws that have curtailed foreign investment. Changing the laws will attract new capital to the market.
Also, accounting rules and regulations need to be amended to ensure they do not create “a pro-cyclical impact on credit capacity,” Rodgers said. And, banks that have existing cash flow need to be encouraged to extend loans.
The panel’s third member, Jamie Woodwell, a commercial real estate researcher at the Mortgage Bankers Association, said the current real estate recession differs from the 2001 recession. In 2001, the dot-com bust results in large amounts of office vacancies while the retail market remained relatively stable. Vacancy rates in office were closely tied to the country’s unemployment numbers.
“This time around,” Woodwell said, retail is more closely following unemployment numbers and being hit harder than the office market. “More firms still have (office) leases in place,” he said.
But things will change, Woodwell said. “Real estate is a very cyclical business, especially now.”
Our guest blogger is Tony Wilbert. He is owner of Wilbert News Strategies, a public relations firm specializing in real estate. Prior to moving into PR, Wilbert covered real estate at several newspapers and served as editor of National Real Estate Investor.
in-common (TIC) funds, which allow smaller investors to own multiple office buildings together, are facing the same issues as giant retirement funds and institutional owners – higher vacancies, falling rental rates and frozen credit markets.