With all the news about the economy and residential real estate I’m sure many people are wondering what is happening with commercial real estate.
Commercial is broken up into different sectors: Office, Retail, Industrial, Multifamily.
First the good news:
Multifamily: Peaked in 2008 locally with investors able to get low interest rates and sellers being able to sell at a low CAP rate and therefore a high sales price. This sector is still strong but investors are looking for higher CAP rates and therefore lower prices since rents are flat now.
Industrial: Is experiencing more vacancy due to continued off-shoring of manufacturing jobs and less consumption at home.
Office: locally is hanging in right under 13% vacancy which is keeping things in a range many would describe as balanced. That being said, many land lords are more likely to negotiate the rate and terms of leases and some are having to hold rates even if they have scheduled bumps.
Retail: This is the most visable sector and also one of the harder hit areas. With consumers spending less on everything many non-essential retailers had to shut their doors in 2008 and 2009. This opens an opportunity for new businesses with lower lease rates and better terms.
The bad news: A little something called Maturity Defaults. What is a Maturity Default you ask? The problem is that unlike home loans which are generally fixed for 30 years commercial loans are usually amortized for 30 years but DUE in 5-10 years. This means that you need to refinance every 5-10 years and with lending getting tighter, vacancy going up, business revenue down this is creating a problem. We are going to have many cases of businesses nad investors that paid on time, have equity and are not going to be able to get a new loan. This issue is called a “Maturity Default.” For a fantastic article with graphs and info check out Bill Connerly’s blog Businomics.