Retail News Blog

Now that the reality of the credit market crisis, which really began in July 2007, has fully taken effect, 2009 has been a period of repositioning within the market.  Ironically, the repositioning will be a “return-to-the-old”.  Commercial real estate values are returning to the core fundamentals that always drove the market prior to the rise of Commercial Mortgage Backed Securities (CMBS).  The availability of easy, non-recourse money and the flood of investors transitioning away from Wall Street in the late 1990s led to an unprecedented spike in demand, which caused a dramatic increase in prices and a loosening of investment standards. The results have been painfully evident.

The last couple of years have represented a time in which markets stagnated, not solely due to the lack of available capital, but also due to the gap in expectations between buyers and sellers.  Sellers clung to memories of historically low capitalization rates and aggressive rent projections, while buyers assumed the worst in their cash flow analysis and disregarded cap rates altogether.  The chasm between buyer and seller over the last couple of years has been wide, to the point of stunting almost all activity in the market.  The result of the stagnation is that market values are relatively vague across most property types.

Most industry experts concur – the commercial real estate market trails residential and is affected by all the additional market conditions in play. When combined with the still-compounding effects of stock market fluctuations, increasing unemployment, decreased consumer spending (related impacts to retail sales and more), and ongoing corporate restructuring and downsizing to adjust to the greater cycle, conditions are likely to worsen in the short- to medium-term. Key markets such as New York are just beginning to feel the impacts of financial sector lay-offs with commercial space inventories dramatically increasing and residential foreclosures accelerating. These key markets set trends across other areas of the nation.

In addition, as financial institutions continue to flounder or be seized by the FDIC, related asset workouts are the growing trends. In the past, the FDIC would typically take over one bank in a time span covering years. In 2009, as reported on CBS’s 60 Minutes, the FDIC has seized over 50 banks to date and the number is growing. Sitting on the books of these failed financial institutions are portfolios of properties that must be immediately appraised for true, current value and factored against the market conditions in order to get them sold. A related increase of property sales to liquidate these assets, both previously foreclosed properties and those in active loan management, will have direct, negative impacts on the market through further increases in inventories and the liquidation of assets at drastically reduced prices to facilitate rapid disposition and cash flow.

With all of these factors in play, expect market participants in the future to be more realistic in their internal underwriting, but to place emphasis on initial cash-on-cash returns and a flight to quality.  Well-located and tenanted product will slowly begin to move again as the expectations between buyers and sellers move toward each other. However, the flight to quality will benefit the some markets sooner than other areas of the U.S.