When will the commercial real estate market pivot? – Daily newsletter
Much has been written lately about the economic storm clouds gathering on the horizon. If you doubt what I am saying, pick up any periodical, listen to the radio or network news and mentions of inflation, interest rate hikes and Fed remedies will abound.
Like a desert monsoon that begins with a puff of clouds and turns into something bigger, everyone senses the downpour is coming, but most don’t know how extreme the soaking will be. Full disclosure: Me neither.
Certainly, my years of experience and the testimony of several downturns can add credibility. But, the reality is that all are different in their causes. Take the example of 1990-1994. Loose lending by savings and loans and their eventual demise, overbuilding, and Iraq’s invasion of Kuwait catalyzed the boom years of the late 1980s to a screeching halt.
And 2008-2011? Easy money for unskilled homebuyers coupled with another round of massive housing starts was ill-prepared for a music break. Many were left without a chair when financial markets froze and lending stopped.
Today the culprits are the pandemic that has left us confined at home with stimulus checks and supply chain lockdowns. The classic case of too many dollars and too few goods kicked in, causing consumer prices to spike. Not since the Carter years have we seen such high inflation.
Real estate, both commercial and residential, is caught in the crossfire. Housing has started to slow as purchasing power is directly impacted by more expensive loans. Even though the inventory of homes for sale is low, offers are lasting longer and the frenetic pace of January 2022 is a distant memory.
So when will we know that the trading market is slowing down? The following will provide some guidance.
As I mentioned, commercial real estate trends follow residential real estate trends from 12 to 18 months. But we will soon feel a slowdown – if it happens.
First, rosters will languish. What flew off the shelves earlier in the year will take longer to rent or sell. Remember, our vacancy is at historic lows. So it won’t happen next week. But, maybe an offer that has generated multiple offers will settle for one or two.
Then the owner’s motivation will change. The longer a vacant building sits fallow, the more an owner will want to fill it.
Prices will stabilize and then fall. With occupants on the sidelines, owners will be forced to do business. One way to do this is to reduce the asking prices.
As rents adjust, values will also adjust. Remember, the price an investor will pay is a return on the lease check a tenant writes each month. A drop in this amount coupled with a rise in cap rates results in a drop in the price per square foot.
Believe me, I carefully watch all of the above. Even today, as we were leading a tour, the conversation centered around “where are we going” in regards to our landlord’s situation. Yeah. An entirely different rhetoric prevailed just three months ago.
Allen Buchanan is a Principal and Commercial Realtor at Lee & Associates, Orange. He can be reached at 714.564.7104 or [email protected]