Interesting Point of View on Commercial Real Estate Market

Posted by admin on May 11, 2009 under Good Info - Read It | Be the First to Comment

If you are involved in the commercial real estate market in any capacity, it should be clear to you that the frothy market of 2006 and 2007 evaporated in 2008 and has yet to return. Volume in all property types is significantly off and cap rates are higher, meaning that property values have decreased.

Where are we going? 

The good news is that the Dallas-Fort Worth market has held up far better than the nation as a whole. North Texas did not have the rapid appreciation that other parts of the country enjoyed, so we do not have as far to fall. Our economy is still producing jobs, although at a greatly reduced rate. The recent modest positive job creation may actually cease before we are out of the current recession, but once again our local economy is faring much better than the national economy. North Texas also has a well documented history of leading the country out of recessions.

My best “crystal ball” prediction is that we have another 18 months to 24 months before we see significant economic improvements in the Dallas-Fort Worth economy. With the recent decline in energy prices, it is possible that we may experience modest deflation in 2009. I anticipate that the deflationary cycle will be short followed by an extended inflationary period in 2010 and beyond. I do not see how we can avoid inflation, which is typically the result of government deficit spending (that is currently at an all time high). The good news is that real estate generally does well during inflationary periods, especially in locations with increasing populations and expanding employment, such as our North Texas economy.

Comparison to the 1980s and 1990s

Those that follow the commercial real estate market and were around in the ‘80s and ‘90s are well aware of the “winners” and the “losers” in this type of real estate cycle. The “losers” were real estate investors that had notes due, or notes that were called, during an economic time when it was nearly impossible to obtain financing. Other “losers” were the commercial banks that folded. The “winners” were the buyers that purchased deeply discounted commercial properties from entities such as the RTC and FDIC, that were given the job of disposing of “problem” properties. Historically, this was one of the biggest transfers of wealth in our country’s history.

Buy or hold

While you do not want to be a seller in this market, if you must sell during the next 24 months, then evaluate your property and the submarket extensively. Price your property realistically, market the property aggressively and do not let a potential buyer get away from you. Research the commercial mortgage market and know what type of financing that your buyer will be able to obtain. You need to know your property, your marketplace and the available financing better than your buyer. If you do not need to sell, then I recommend that you hold your property for better times. Concentrate on maintaining tenants, keeping operating expenses in check and maximizing the net operating income. A stable and proven cash flow will be to your benefit when you market your property during the upcoming recovery.

I feel that this is the time to be purchasing commercial property in North Texas. Throughout my 30 year career in investment sales, I have seen many market cycles.  I have been rewarded by exercising discipline and buying aggressively in down markets, and selling when others are still aggressively buying. Having a “contrarian” investment philosophy is difficult for some investors to grasp. While it is much more popular to follow the mob and invest as the crowd does, I would encourage you to buck this trend and look for solid investments now. Keep in mind that there are motivated private sellers in the marketplace now and lender foreclosures with some outstanding opportunities.

As in all forms of investing, you must exercise discipline. Always carefully scrutinize the investment before pulling the trigger. Pay cash or secure prudent levels of debt and make sure that any financing does not mature until well after the economic recovery. Also, have proper reserves to weather the uncertainty still remaining over the next year or two. Finally, carefully evaluate the management and leasing needs of the property. Some investors hit the “home run” of finding a “steal” only to lose money due to ineffective management.

Throughout all of this, remember to keep a positive attitude. It is easy to get discouraged when all of the media reports are so negative. Focus on our local economy and what you know best, and you will see positive results as a commercial real estate investor.

Steve Fithian is managing director of Sperry Van Ness/Visions

Commercial in Fort Worth.