What's going on in the marketplace? I'm asked this at least once a day.
On a local level, I'm stirring several pots, but having difficulty getting those pots to boil. Until lending is freed up (see yesterday's post), the job market picks up and investors are confident it looks like they're just going to simmer a while longer.
Why are we optimistic that the market is recovering?
First, we see that solid assets in all markets are selling close to where they were in 2006. This is a good thing for the markets in general and we've seen a few examples of that in Savannah (think the old Backus Building, 516 Drayton, 1326 Eisenhower, 27 Bull Street). Second, activity around U.S. ports is increasing and ports are considered to be bellweathers of the economy.
"On the whole, despite the uneven nature of the recovery, surveys seem to indicate that commercial real estate investors remain optimistic about the recovery despite ongoing issues with the economy[2]. In fact, a “lack of new supply and low interest rates” are actually driving up investor interest in the sector, reported PriceWaterhouseCoopers LLP. The fact that there will likely be “very few additions” to the commercial property market supply in the short term is also contributing to the absorption of space, PwC reported, adding that tenant demand would likely increase in the coming months." This quote comes from a Bryan Ellis commentary that explains the two-tiered commercial marketplace.
Third, commercial real estate brokers and investors are excited about the innovations they're seeing in the marketplace. Because there isn't demand for new construction, investors, developers and businesses are doing more with less, reinventing current spaces, making buildings "green" and using technology to better the business.
Gary Shapiro writes for Forbes that, "...innovation can – and does – occur in every industry of our economy, from consumer electronics to health care. Commercial real estate is no exception. With millions of Americans employed at retail or working in office buildings, this once sleepy industry is smartly innovating and benefiting from new markets and technology."
"At last week’s RealComm technology real estate conference in Orlando, Fla., I enjoyed the vision shared by Bill Hankowsky, President and CEO of Liberty Property Trust, who, among other ventures, recently completed Comcast’s new Philadelphia headquarters. He noted that with rising energy prices and companies cutting back on space, the commercial real estate market must start innovating. He mentioned how GlaxoSmithKline’s office-space needs at their headquarters have shrunk from 600,000 square feet to 205,000 square feet, but not because of a fall-off in business. Rather, technology, innovation and changing human behavior have reduced the amount of required office space. Companies and employees are able to do more with less space – the very heart of innovation." You can read the rest of Shapiro's article here.
The L.A. Times reports that big box retailers like Best Buy and Sears are actively seeking tenants for up to 20% of their retail space. Online sales and online rivals are driving the decrease in demand for building space. The Best Buy here in Savannah hasn't announced that it seeks a tenant for relinquished space, but the downsizing experiment works well in California, I wouldn't be surprised to it happen across the country.
Lastly, you have to examine how and where commercial real estate prices fell. The declining prices are happening across the country, true. However, these prices come from distressed properties- a lot of them. Large numbers of distressed properties selling for rock bottom prices simply drive down overall industry numbers.
"The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000, the company said in a report today. The index, which measures broad national price trends, has fallen for five straight months as sales of distressed properties undermined real estate values." This market snapshot reported by Bloomberg is a very close look at very big picture.
PricewaterhouseCoopers offers a comprehensive explanation of the big picture. "Buyers are pursuing deals as the market improves, and concern that that the economic recovery will falter has deterred “very few” investors from acquiring assets, PwC said. The Standard & Poor’s 500 Index has fallen 5 percent from this year’s high on April 29 after signs of slower U.S. growth, including data showing that employers in May added the fewest jobs in eight months.
“The lack of oversupply, strong corporate earnings and a pattern of job creation, not just one bad report -- that’s what is fueling cautious optimism that the economy will recover and rents will rise,” Mitch Roschelle, partner at PwC’s U.S. real estate division, said in a telephone interview yesterday."
The agents here at Coldwell Banker Commercial Platinum Partners agree with the latter report. Commercial vacancy rates may be high, but they are decreasing. We've all seen an increase in leasing activity. Investors are curious, new investors and businesses are leasing, and investors with money are buying. There is definite excitement around considering the two new VA hospitals that are to be built, the expansion at Mitsubishi, the eventual harbor deepening and the Gulfstream expansion.
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