Commercial Real Estate Still a Safe Bet

When it comes to the current bust of the housing mortgage and the many woes in the mortgage industry, it’s easy to point fingers and assign blame. Obviously there are many factors involved, including the weak economy and consistent hemorrhaging of jobs to overseas. This practice has hit the manufacturing industry particularly hard, and areas such as Michigan, Indiana, and Ohio have especially taken a hit, and these areas have seen record delinquencies and foreclosures.

Obviously the economy is not the only issue here. Many of the mortgage problems are in the sub-prime market, where a huge risk was taken in just signing these loans in the first place. It’s not to say, “You should have known better,” but many industry analysts predicted these problems years ago.

But what about commercial real estate? Has it taken a hit as well? Office buildings, retail centers, shopping malls – how have they been affected?

Not affected, but not immune either.

Believe it or not, commercial real estate seems to not only be unaffected by the housing slump, it is showing growth in its sector, albeit a bit cautiously. According to CNN and the Associated Press, a recent articles states that, “Led by strong growth in the office and retail segments, commercial property sales hit $401 billion through Oct. 18, outpacing last year's $359 billion total, according to Real Capital Analytics, a New York based real-estate research firm.

Construction spending on office buildings, shopping centers and other private, nonresidential projects jumped 15.2 percent in August, the Commerce Department said last month.”

This is good news for real estate investors who have always seen commercial property as a safe place to park funds, however, it doesn’t mean that there are no risks to commercial property real estate growth, especially as the economy slows down.

With more and more people facing higher mortgage payments as rates adjust, and with a record number of foreclosures, of course the economy overall will of course be affected. Tighter budgets mean tighter wallets, with less discretionary spending to support the malls and retail outlets, as the article continues:

“As home prices continue to fall, people feel poor and spend less," and that puts pressure on the profits that fuel corporate spending, said William Wheaton, research director at the Massachusetts Institute of Technology's Center for Real Estate. He puts 50-50 odds on a mild recession in the U.S. within the next six months.

If the broader economy stumbles, the commercial real estate market would be vulnerable to "credit-risk contagion," Wheaton said. Already, the credit crunch that started in mortgages has spread to other markets, including the commercial market, with some sellers asking for more capital upfront when mortgage-backed assets are financing a transaction.”

Of course all parts of our U.S. and even the world’s economy are interlaced. Jobs going overseas means less need for office and industrial space here. Rising costs everywhere means less money to spend for nonessentials, which are the typical offerings at major malls and retail outlets. Families are putting more money toward filling the gas tank and less toward new clothes.

It’s also a sad fact that some people are maxing out their credit cards just to pay the mortgage payments. For many, they simply cannot stretch the family’s budget to cover all necessities and the house payment, and rather than risk foreclosure, they simply charge a house payment. This means they actually have less room on those credit cards for other spending, and of course local malls and stores will suffer.

Adding to this problem is the advent of online shopping, where most are happy to pay the few extra dollars for shipping if it means being able to shop in the comfort and convenience – and sometimes bunny slippers and pajamas – of their own home. Some businesses report that brick-and-mortar stores actually lose money for them and are being supported by online shoppers. This is especially true for businesses where consumers do not need to get a hands-on feel for an item before purchasing the way they do things like clothes and shoes; items like office supplies and small kitchen appliances can easily be purchased without a “test drive” first.

Why the difference?

If the commercial real estate property sector has shown itself somewhat immune to the problems facing other real estate industries, one might ask why there is such a difference. What keeps this industry safe from the common problems facing the residential mortgage industry?

Simply said, much of the problem with the mortgage industry today again goes back to sub-prime loans which were high risk from the outset. Borrowers in the industry were risky to begin with, and this record number of defaults and foreclosures will continue to push home prices down and cripple the construction industry. Again quoting CNN:

“The commercial market has not been dragged down by the residential mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial flexibility and resources to ride out credit-market turmoil, experts said.

“It's a different animal than the nonresidential construction business with the direct relationship between banks and business leaders, not banks and homeowners,” said Bernard Baumohl, managing director of The Economic Outlook Group in Princeton, N.J.”

This isn’t to say that commercial real estate investors are necessarily smarter than those in other parts of the industry. However, there is much to be said for being more experienced and more patient when it comes to lending and investing. Many borrowers and lenders alike jumped on the sub-prime bandwagon because they were easily seduced by the thought of owning a home and the thought of becoming wealthy through mortgage lending. The sub-prime market was seen by some to be a huge untapped pool of potential income.

These borrowers, however, were often naïve in accepting purposely under-inflated introductory interest rates in order to quickly close the loan and get into a home. As rates adjusted, or as they faced other economic woes, they became unable to meet their payments.

Experienced investors in commercial real estate have not faced these same issues. Their experience tells them to be wary of both borrowers and lenders that are high risk. By using that experience and showing some patience when playing the market, they’ve been able to protect themselves against the other common problems facing the real estate market today.

Contents

• How Much Mortgage Can You Afford?
• Buying a Good Vacation Home
• Buying a Home for Resale Purposes
• Claremont is the Top Earner – and Most Expensive
• Commercial Real Estate Still a Safe Bet
• Determining Your Offer Price
• Empty Homes for Sale
• Exercise Caution When Flipping
• Expensive and Alternative Homes
• Figuring Property Taxes for the High-End Real Estate
• Florida’s High-End Real Estate Goes Limp
• Foreign Investors and the Hamptons
• German Investment in U.S. Real Estate Creates a Bidding War
• Getting Wealthy From Real Estate Investing
• Going Green
• High-End Goes High-Tech
• High-End Investors – Why Immune to the Real Estate Crunch?
• High-End Real Estate Feels the Crunch?

• High End Property Site Map