Many of us believe the next shoe to drop in the U.S. economy are commercial properties. Although it will be a buying opportunity for some it will be disastrous for most. It has already begun in many places and just starting in others. Consumer confidence continues to decline bringing little hope for improvement for some time.
Excerpts from International Property Journal; Real Capital Analytics reported that total U.S. commercial sales
volumes plummeted from $557.8 billion in 2007, to $181.6 billion in
2008, to a miniscule $54.4 billion in 2009.
As in any leveraged investment, so goes lending availability and costs, so goes value. And values have plummeted as lending has evaporated. Compared to 2007 total commercial lending was down 63 percent from 2007 to 2008, and another 50 percent from 2008 to 2009 (per the National Mortgage Bankers Association based on averaging their quarterly lending index). When comparing 2009 to 2007, commercial lending was off 81 percent. That’s a train wreck.
While it is impossible to pinpoint the value change of any specific commercial property without doing a full-blown appraisal, we can talk reasonably knowledgeably regarding major price trends. Unlike residential real estate, commercial is more nationally and internationally held, with investor motivations being return driven.
The impact? Limited refinancing capacity and lending on new purchases will continue to put pressure on commercial real estate values (from the glass half-empty perspective). Yet prospective buyers have not seen opportunities like this since the late 1980s provided they bring significant equity to the table (the glass half full view). Simply stated, this is the best buying opportunity for commercial real estate since 1988 and 1989. Fortunes will be made by those who act.