{"id":1004035527,"date":"2011-12-09T06:58:33","date_gmt":"2011-12-09T14:58:33","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004034965"},"modified":"2022-12-06T07:09:09","modified_gmt":"2022-12-06T15:09:09","slug":"guest-column-commercial-real-estate-2012-2","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/guest-column-commercial-real-estate-2012-2\/","title":{"rendered":"Guest Column: Commercial Real Estate, 2012"},"content":{"rendered":"<p>By Richard Hollowell<a class=\"highslide\" href=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2011\/12\/Richard_Hollowell_infocus.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"alignright size-full wp-image-1004034957\" title=\"Richard_Hollowell_infocus\" src=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2011\/12\/Richard_Hollowell_infocus.jpg\" alt=\"\" width=\"200\" height=\"113\" \/><\/a><\/p>\n<p>Making sense of the extraordinary commercial real estate challenges that we face in today\u2019s troubled economic times requires an understanding of where this market has been and where it is going. But when was the last time the Federal Reserve Bank announced in advance that it would keep interest rates at an historic low for at least two years? In a word, never.<\/p>\n<p>In 2005, as the \u201cperfect storm\u201d was brewing that eventually decimated the residential real estate market, we looked back just 10 short years to the closure of the Resolution Trust Corp., saying, \u201cIt can\u2019t happen again.\u201d Today, commercial real estate seems positioned to follow the fate of the residential asset class as the economy teeters and loan maturities loom against a backdrop of aggressive property purchases.<\/p>\n<p>About $1.4 trillion in commercial real estate loans will come due between now and 2014. Most of these loans were made in 2006 and 2007, and the underlying collateral has lost as much as 40 percent of its value due to increased vacancy and declining rents. Nearly half of these loans are underwater. As a result, borrowers and lenders are faced with an equity gap that some experts have estimated to be more than $800 billion.<\/p>\n<p>With most borrowers unable to raise funds, local\/regional banks and CMBS lenders in particular will continue to face severe losses. Only a dramatic economic recovery that extends from Wall Street to Main Street can help us avert this. In the end, only government action may prevent commercial real estate debt from further derailing our fragile economy.<\/p>\n<p>We have analyzed rapidly changing economic conditions over the past 36 months to help hundreds of businesses successfully maneuver through a market that is unlike anything we have seen in our lifetime. While market conditions continue to change daily, we anticipate the following issues being around for a while:<\/p>\n<ul>\n<li>A      second commercial real estate bubble is highly likely as core investment      funds continue to overpay for apartments, office buildings, shopping      centers and hotels in primary markets. Properties are trading at      aggressive cap rates, as investors employ five-year hold\/sell strategies      while counting on increased occupancy and rising rents. In fact, interest      rates will rise over the typical hold period, as will cap rates. And many      investors are simply overlooking economic factors that will negatively      impact the demand for commercial real estate: continued high levels of      unemployment, corporate frugality, tight lending standards and global      economic uncertainty.<\/li>\n<\/ul>\n<ul>\n<li>The      troubled real estate market has been responsible for closing hundreds of      small and regional banks, and those closures continue. Experts believe the      commercial mortgage-backed securities (CMBS) default rate will hover      around 10 percent through 2012. As more banks close, small businesses will      be denied financing, which translates to fewer jobs. Tax cuts oriented to      small business are absolutely necessary to stimulate small-business      growth.<\/li>\n<li>Expect      to see real estate-related litigation explode over the next three years as      banks, CMBS servicers, limited partners, pension funds, government      agencies and insurance companies sort through their losses and look for      ways to recover. The Federal Deposit Insurance Corp. (FDIC) has already      authorized more than 300 lawsuits against officers and directors of failed      banks, and a cottage industry is emerging among law firms and expert      witnesses seeking to serve either plaintiffs or defendants. Many are      already enjoying the spoils of this real estate-related litigation      outbreak.<\/li>\n<\/ul>\n<ul>\n<li>Most      Americans have gone from talking about how much they spend to how much      they saved. As a result, the prospect for new commercial real estate      development will be very low for the next few years as existing buildings      vigorously compete to fill space, with the hope of raising rents in future      years. Investors should remember that rent growth is not guaranteed and      that current rental rates in some markets are the same today as they were      20 years ago.<\/li>\n<\/ul>\n<ul>\n<li>To      eliminate some of the uncertainty and get the commercial real estate      market back on track, we need a \u201cbreak-out\u201d industry\u2014think high-tech and      energy products and services that cannot be easily offered elsewhere \u2014to      inspire consumer confidence and spending. \u00a0These magnet industries      will become a driver for the economy, increasing disposable income and      consumer spending.\u00a0 This in turn will drive employment, which will      increase the demand for more office, research-and-development and      industrial space. \u00a0Without intense focus in this area, it will be      extraordinarily difficult to stimulate economic growth. \u00a0Otherwise, a      double-dip recession has more than a 50 percent chance of occurring,      according to industry experts and economists.<\/li>\n<\/ul>\n<p>That said, there are some opportunities emerging:<\/p>\n<ul>\n<li>Depressed      residential properties will be snapped up over the next 24 months by Baby      Boomers, who will get incredible deals on retirement homes in the Sunbelt      states, where a massive wave of Boomers is expected to relocate. Home      prices are at rock-bottom in some very attractive markets. Now is the time      to buy for those that have sufficient liquidity and cash flow. This      migration will also help stimulate the commercial real estate markets in      these areas.<\/li>\n<\/ul>\n<ul>\n<li>Other      Baby Boomers \u2014reeling from foreclosures, job losses and downsized retirement      nest eggs\u2014will accept a rental apartment lifestyle and austerity as the      \u201cnew normal,\u201d as will the younger generation, as many Americans abandon      their dream of home ownership, sparking the development of multi-family      rental apartments, particularly in the Sunbelt states. As an asset class      used by Main Street Americans, apartments offer potential as an investment      focus.<\/li>\n<\/ul>\n<ul>\n<li>Regardless      of the asset class, those interested in commercial real estate investment      today might want to consider secondary markets as the best bet, since      prices will not be driven up by the big institutional buyers.<\/li>\n<\/ul>\n<p>Whatever your focus, if you plan to be involved in commercial real estate investing over the next five years, sharpen your due diligence skills, study domestic and global economic trends, and fasten your seat belt for a bumpy ride.<\/p>\n<p><em>Richard K. Hollowell is managing director of Reznick Group\u2019s Los Angeles office.\u00a0 For more than 35 years, he has specialized in the evaluation, management and disposition of real estate-related assets.\u00a0 He is nationally recognized for advisory work provided to the FDIC-insured banks, thrifts, pension funds, insurance companies and federal agencies \u2013 including the FSLIC, TTC and FDIC. Hollowell is a contributing columnist to real estate publications and frequent speaker at real estate conferences throughout the world. He can be reached at\u00a0<a href=\"mailto:Richard.Hollowell@reznickgroup.com\">Richard.Hollowell@reznickgroup.com<\/a> or (310) 843-9700.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Reznick Group&#8217;s Richard Hollowell warns of more rough seas ahead.<\/p>\n","protected":false},"author":1654,"featured_media":1004038399,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21784,21825,22251,21783],"tags":[],"class_list":["post-1004035527","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-brokerage","category-finance","category-in-focus","category-investment"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v24.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Guest Column: Commercial Real Estate, 2012 - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/guest-column-commercial-real-estate-2012-2\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Guest Column: Commercial Real Estate, 2012\" \/>\n<meta property=\"og:description\" content=\"Reznick Group&#039;s Richard Hollowell warns of more rough seas ahead.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/guest-column-commercial-real-estate-2012-2\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2011-12-09T14:58:33+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-06T15:09:09+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2011\/12\/Richard_Hollowell_infocus.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"200\" \/>\n\t<meta property=\"og:image:height\" content=\"113\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Richard Hollowell\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/guest-column-commercial-real-estate-2012-2\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/guest-column-commercial-real-estate-2012-2\/\",\"name\":\"Guest Column: Commercial Real Estate, 2012 - 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