April 2010

    

Strictly Commercial

Baltimore Commercial Real Estate News and Opinions

 

 

Recessions and the Cyclical Nature of Commercial Real Estate

April 2010

 

This is the third recession since I got into commercial real estate in 1988.

Within my first year as a broker, recession number one had hit.  It lasted into the mid-1990s.  The country’s economy was in a recession but the commercial real estate industry was in a depression.  Our motto back then:  “Stay alive until ‘95.”

At the time, commercial real estate was over-built as a consequence of the supply of easy financing.  Sales prices and rental rates dropped like rocks, sometimes more than 50 percent.

There were no buyers or tenants.  In one bizarre scene at the showing of a building, three brokers were fighting over the right to represent one tenant, the only company with a pulse.  Ironically, that tenant went out of business a year later.

Coming out of that real estate depression was long and hard.  Over time the economy expanded, jobs were created, prices went up, and, once again, buildings traded hands, sometimes on multiple occasions.   

My second real estate recession was after 9/11.  During that time you had the dot-com bust and, of course, the terrorist attacks.  The airspace over America was closed.  It took a friend of mine a week to get home from Arizona.  The economy froze up too.  People were expecting “9/11, the sequel.”  The Twin Towers, the world’s mightiest 16 acres of commercial real estate, were destroyed.  

Business came to a halt.  For a year plus after 9/11 most people were not thinking about commercial real estate.  Prices took a dip, but fortunately the market was not in a severe decline for long.

From 2003 to 2007 commercial real estate took a steady upward direction.  Toward the end people were convinced that prices could only go up.  Developers, afraid to be left out of the game, tackled projects far and wide.  Mega deals were made in the deepest markets.

And now we have the Great Recession.  The housing bust, Wall Street over leverage, and government mismanagement are the main culprits.  We have banks that pose systemic risk.  We have mega deals on the brink of disaster.  We have the exponential expansion of government debt.

Some companies and organizations have failed.  If they had viability problems before the Great Recession then it is no surprise that they are gone.  Some go bankrupt and some just quietly close their doors.  This depresses the demand for commercial real estate.

The Great Recession has resulted in a swelling of the unemployment rolls.  Commercial real estate relies on employment and businesses staying open.  Unemployment depresses the demand for commercial real estate.

This recession has created a psychology of doubt.  Most entrepreneurs, businesspeople, and technologists are optimistic by nature but they are struggling to remain optimistic through the current economic crisis.  Their businesses, laboratories, and manufacturing plants utilize commercial real estate.  Given the current economic conditions, expansion is not in their plans.  When our risk-takers are smothered by doubt, this too depresses demand.  

On the positive side, unlike residential, most commercial real estate people remembered the first recession and did not over-build.  Demand is down but there is no evidence of an oversupply problem.  Owner-user real estate is generally not over-leveraged.

There are a whole lot more commercial properties on the market these days.   Most sellers’ expectations, however, tend to exceed the buyers’ mandatory requirements for “a good deal.”

Also, financing is hard to come by, except for the AAA borrower purchasing the AAA property.  The old adage “cash is king” is as meaningful now as it ever was.  Before trading velocity picks up we are going to need some more price discounting.

There is good news out there.  The market has mostly stabilized.  Prices have declined but not precipitously.  The number of announced deals is on the rise.  Very few buildings are under construction.

 In the long term, as economic activity and employment increase, the demand for commercial real estate will also increase.  Values will rise steadily, toward the end impractically so, until another recession starts the cycle all over again.

 

  

To our clients, thanks for making possible the following Closed Transactions

 

We work all around Baltimore.  We work with out-of–town clients.

 

·Davis H. Elliot Company, an electrical construction and maintenance enterprise based in Roanoke, Virginia, leased 2940 Waterview Avenue, south Baltimore, to house their BGE equipment yard, office, and maintenance facility.

·Menlo Industrial Park, in northwest Baltimore, renewed leases with five tenants:  Shores Automotive, Seven Mile Market, HRS Flooring, Quartner Refrigeration, and Kosher Bite.

·AAA Bio and Computer Recycling leased warehouse space at 1720 Belmont Avenue, Windsor Mill, for a distribution operation.

·Autopart International, a Norton, Massachusetts-based wholesale distributor of superior quality automobile replacement parts, relocated and expanded its Timonium operation with St. John Properties.

·Interstock Cabinets, a Lakewood, New Jersey-based distributor of kitchen cabinets, leased flex space on Easter Court, Owings Mills, a project developed by St. John Properties.

·Timber Ridge Camps, located in West Virginia but headquartered in Baltimore, leased office space at 301 Main Street, Reisterstown, for it’s general offices.

·The Trustee of Patterson Park Community Development Association sold the former Wilson’s Bar, located in the 2300 block of E. Fairmount Avenue, east Baltimore, to be renovated into two town houses.