Get Your Commercial Real Estate Clients Off the Fence!

Welcome to Guest Blogger: Bruce Kaplan, Premier Commercial Realty, Lake-in-the-Hills, Illinois with his take on commercial real estate values:

I know I’m singing to the choir when talking about commercial real estate values over the last three years.  The culprit of their decline, unlike in the recession of 1979-81, is not interest rates.  Unemployment to the tune of 7.5 million jobs has taken out demand and, until recently, capital availability had all but dried up.  Vacancy rates for all commercial property types have soared and rents have plummeted.

While commodity prices have gone through the roof, commercial real estate prices are kicked around like a dog (not my dog), so it’s been painful.  Making it worse, circumstances are likely setting up an inflationary period in our near future.  That will force real estate prices to resume their normal upward trend.  If you can hold onto your commercial real estate long enough, it will provide you with a hedge against inflation.  If you don’t have any commercial real estate in your portfolio, you’ll lose out. 

What I am telling you is – all economic indicators suggest WE HAVE REACHED THE BOTTOM!  What I strongly suggest is – tell your clients.  We are crawling from the wreckage, albeit a slow ascent, but a positive number.  If you’ve been on the fence about urging your clients to buy or lease, make your move – now.  Waiting will cost you.  Not only will prices and rents be higher, but as seen in the Federal Reserve’s, “Interest Rate Forecast 2011-2012,” interest rates will also be going up.  How can I be so sure we’ve hit bottom and have nowhere to go but up?  I’m using 35 years in the business as a backdrop and my common sense.  It takes three components to construct a new commercial building – building materials, land and labor.  If building material prices go up (these are commodities) and the other two components stay the same, the total package price must go up. Traditionally, the cost to build (new construction) sets the upper limit of value for any real estate project.  When you combine higher prices with pent up demand, (natural in a recession) the table is set for a surge in prices.  Pent up demand is more potent when new construction halts for a period of time and no new commercial inventory is created.

If you have been sitting on the fence, now is the time to get off.  The good deals will never be better.

One Comments

  • Clark Mandrell

    May 19, 2011

    I disagree, this is not the bottom. While we have had a slight bump up and may be holding prices here at these levels. That is only in the near term. There are no jobs, no job recovery, record food stamps useage,and the Federal Reserve is about to end QE2. Interest rates will go up when the Fed stop buying their own debt, in the form of bond purchasing. Even with QE3 and maybe even QE4 the Fed cannot continue to print money and increase inflation forever. I suspect prices will hold in this range until another shoe drops or we have and end to the QE’s. At some point prices will fall and I believe prices in commerical real estate can fall at least another 50%. We should see prices fall back to more normal levels of the late 1980’s as they were when we came out of the last great interest rate run up.

    Reply

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