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In this Ask Dennis Video, Dennis Dahm talks about the climate of Commercial Real Estate.
If you have questions for Michael Saunders, email: AskMichael@michaelsaunders.com
Generally speaking, the commercial real estate market operates in a cycle closely tied to that of its residential cousin. Yet, timing-wise, commercial typically trails residential by as much as 18 to 24 months. Thus, it was long after the residential market melted down that the aftershocks began to ripple through the rest of the economy. Eventually businesses downsized—or failed—causing the inventory of vacant commercial properties to rise precipitously, just as demand fell off a cliff.
Is it any wonder then why Southwest Florida’s commercial real estate sector is just now where the residential market was a year ago? As buyers and investors began to respond to the best residential buying opportunities in the first quarter of 2009, they’re likewise beginning to recover their appetite for the best values in commercial properties. Reacting to solid evidence that this mother of all recessions is nearing an end, they’re anticipating inevitable improvements in the job market and scooping-up commercial properties at deep discounts long before the ‘herd’ catches on.
In other words, amid the recessionary mindset of fear, depression and panic—which investors like Warren Buffet and the late Sir John Templeton insist is the precise moment to invest—2010 will be recalled as one of the best years ever for buying commercial real estate. The golden rule of investing, “buy low, sell high,” is once again the call-to-arms for the most forward-thinking investors to ante-up now in order to maximize their ROI later. Those with all cash to spend—in an environment where commercial loans are hard to come by—will be the first to walk the red carpet to the best deals in town.
Like the residential sector, the market for commercial property has not been immune to the challenges presented by the broader real estate correction of the past few years. Further, even though residential sales are exhibiting the earliest stirrings of a comeback, activity in the commercial sector continues to be contracted; due mainly to tightened credit, more properties to sell—including an increasing number of foreclosures—and conflicting economic predictions fueling buyer uncertainty. Moreover, the disconnect between what sellers want and what buyers are willing to pay for a property is clearly causing sales to be worse than anemic compared to activity in normal years.
Fortunately, just as the residential real estate market is cyclical in nature, a complete recovery is fully expected for the commercial sector. It will take a while longer, to be sure, as the commercial correction commenced long after the residential correction was well underway. The most encouraging news as we mark the midpoint of 2009 is that the current market environment will cease to get much worse. Many leading indicators predict the commercial sector will likely bottom-out before year’s end. Meanwhile, there remains a continuous flow of capital-rich investors seeking to purchase heavily-discounted bank-owned properties through foreclosures and short sales.
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