Selling Savannah Now, Commercial Real Estate Services: What Matters For Commercial Real Estate: Supply And Demand

Monday, February 27, 2012

What Matters For Commercial Real Estate: Supply And Demand

Investing 2/24/2012 @ 12:23PM by Brad Thomas

Summary: Sam Zell told CNBC that simple supply and demand shows why commercial real estate "must come clean by 2013" meaning that we must put the majority of distressed real estate behind us by then. Zell says our problems can be summarized in one word, "demand". The author says our problems are summarized with another word: "jobs".

Key Quotes:

Zell said, "We have built nothing since July of 2007. That’s the good news. So we’ve had no additional supply. The bad news is that we’ve also had less job growth and less demand. So literally, the existing facilities are getting filled up, but at rates that don’t reflect new cost. So I think (commercial) real estate still has another couple years to get its act together.”

Regarding multifamily housing, combine[...] surging demand from renter households that are postponing decisions to buy homes because of the flagging for-sale sector, and you’ve got a great combination. That’s why vacancy rates dipped by 280 basis points in 2010 and 2011, ending at 5.2%, the lowest vacancy rate in more than a decade.

For office properties it’s a little less ideal. Anemic job growth means less demand for office space, but supply growth was halved from 2004 to 2008, compared to 1998 to 2003. As a result, office properties have less of a glut to deal with.

Retail properties have it worst.

According to Trepp, LLC, the third quarter 2011 distress levels for construction/land is 16.28%, commercial mortgage is 4.85%, and multi-family mortgage is 3.57%. As Zell referenced, distressed assets should continue a linear decline in 2012 and 2013; however, distressed land will not be as responsive to the overall recovery. The commercial real estate markets are still flooded with distressed assets and expiring loan maturities.