Follow up to the state of the market - May 5th

In my May 5th posting, I discussed the current market conditions and how they compared to the events of the early 90's. As many of you are always interested in where the market stands, I thought I would provide some interesting information. According to Loopnet research:

In Q1, overall sales in Charlotte decreased 74% compared to the prior year. Over the last twelve months, the price per square foot for office property is down 73%, multifamily is up 26%, industrial is down 32% and retail is up 12%.

Of course this doesn't mention that 2008 wasn't such a good year either!

The bright news is I am seeing signs of activity, albeit slow. The "fear factor" seems to be waning from what I heard from small business owners over the last several months. For some businesses it seems sales have returned to their norms. As mentioned in my last article, the election will have a major impact on businesses' psyche. Many believe there will be a major house cleaning in government in the fall and those people may already be acting on the belief.

Something unusual is happening in the investment market. In an article on CoStar, the author believes CAP rates have actually fallen from 8-9% last year to 7% this year! I found this very hard to believe as I haven't seen any activity in investment sales. He expands further in the piece to say this may only apply to the highest quality properties with stabilized revenues. This trend may also be the result of REIT's, foreign funds and pension funds heading back to the market. I don't believe regular properties are going to do any better than 9-10%, but I also don't expect rates to get near 12% as they did in the mid-90's. Of course, this doesn't mean a thing if you can't borrow the money for the project.

What about lending?

In an article from the National Association of Realtors they performed a survey of loan officers last month. In that survey most lenders did not change their practices in Q1 and a small fraction of banks actually tightened lending to businesses and households.

There is a lot of conflicting information. I talk to lenders and they tell me they are busy. I believe it is mostly refinancing.

So who are we actually seeing in the market?

A few segments seem to have most of the activity. I'm seeing a lot of start ups, such as folks who have lost jobs or businesses and are starting something new and downsizers (those who have scaled way back, such as RE brokers). I'm seeing race teams back and out looking. The ad money must be flowing.

According to CoStar research, the major tenants in the largest markets are out shopping for long-term lease deals to solidify their positions for years to come. As I predicted in my last blog, this is the next phase of the cycle and usually a busy one. Once the economy catches up to the small businesses they will also get out looking for steals on long leases.

Feel free to write back about activity in your world. As always, let me know how I might be able to assist you in your commercial real estate activities.

Thanks for reading.

Tadd Holzen

704-458-5552

Tadd@Holzencommercial.com

http://www.holzencommercial.com/

Where do we stand in the Commercial Real Estate Market Cycle?

As a commercial real estate broker people ask me everyday; where do we stand in the commercial real estate market right now? Well, here in the Charlotte area and in particular the Lake Norman area we stand in the ditch! Never have I seen such a slow market as the last year and actually the last two years. What are market rates and prices? Your guess is as good as anybodies.

Everyday there are calls from appraisers and questions from clients about market numbers. How do you make a market when nothing is moving. Does a distress or foreclosure sale make the market? Doubtful.

What is happening are kick the can down the road deals. Almost no sales and just short term leases. There is not enough confidence in the business community, at least the small business community, to enter into long term leases. So we get short renewals and one and two year leases.

Are we at the bottom? Who knows. There is a lot going on out there that gives cause for pause and angst. Sitting on your hands seems safe. In my opinion we are at the bottom and have been. We may continue to stay here through the election. All we need is a reason to sit and wait, right?

Interestingly, while some landlords and sellers are in trouble and have to do anything possible, many have been able to hang on. There is not much of a market so why do anything crazy unless you have to.

The banks know this too. I'm shocked at the number of problem mortgages where the bank is not moving on a foreclosure. They don't want things on their books that they then have to dump. Better to stall and let owners work out their problems.

A valuable comparison is to look at the last commercial crises of the late 80's and early 90's. I was green in the business then didn't know any better. I thought every deal was very difficult. The crash in the market was then brought on by the banks. Banks would lend over 100% to a developer. Guys were building properties and making their money on the building completion! Selling or leasing was just gravy, if you cared. The project didn't even have to make sense. The market became overbuilt.

There was an interesting saying in the business: Stay alive till '95. That's when the old timers thought the market would resemble normal times. It was true but things didn't really improve until the late 90's. That's a ten year cycle! We are likely going into out third year of this go around. I believe we will stay here until something happens to instill confidence in the economy. It may be an election, a return to lending, who knows? Once people think we are past bottom what happens then?

Around '92-'93 there were guys with cash running around looking to buy properties from the RTC, banks, insurance companies at 25 to 50 cents on the dollar. I was selling those investment properties to older guys who said they would never see this market again. Two and three years later I was selling the same properties at double the money.

What about leasing? Similarly, you couldn't give space away early in the cycle. Once things turned many businesses ran out to sign five year leases to lock in great deals. Those were the days of a great rate, lots of free rent and whatever else you want!

So you say, "This is great info Tadd but what should I do?"

In my opinion we are at the worst. If we see major changes in November the small business community may reenter the living world. Plan on making your deals in early 2011.

If you are a buyer you are going to have to look hard for great deals. This time I don't think you can just look at the menu of foreclosures. You are going to have to dig and see who can't hold on any longer. Are you a tenant? By now you have changed your business to the new paradigm. Take advantage of the lag in market improvement and do long term deals. Landlords who had the ability to ride this out want to stop taking losses quickly. Remember rates are sticky on the downside, not the upside.

For landlords and sellers my advice is continue to be aggressive. Free rent is meaningless right now. Trade free rent for a quickly escalating lease. Create a value added situation to attract tenants. It may mean furniture in a deal, buildout, etc., something to make your space more desirable. It has always surprised me how owners would let space sit for years until exactly the right deal came along. The answer was usually risking a loss versus guaranteeing a loss. Selling; get creative. Can you hold paper or do a land contract? Installment sales make great sense if there is nowhere to reinvest. Does anyone remember how many deals were done before the banks gave money to anyone with a pulse?

How can I help you? Take a look at my website: http://www.holzencommercial.com/

Tadd Holzen