Wednesday, February 4, 2009

CRE May Not be the Other Shoe to Drop?

The Times Economix blog argues that commercial real estate will not suffer the same crisis that followed from the housing surplus.

For months now, experts have been predicting that commercial real estate will be “the other shoe to drop.” But in fact, non-residential building fell far behind housing construction during the housing boom. This shortage of commercial buildings relative to housing suggests that a commercial real estate crisis will not occur, or that at worst it will occur with much less severity than did the housing crash.


Kevin Kleen on February 04, 2009 10:54 PM said...

Mulligan's argument is CRE won't collapse because it wasn't overbuilt. The problem is, to the extent CRE supply was tight the effect was to inflate values. Now that aggresive CMBS underwriting is no longer available to roll over debt and employment is declining, it's likely those values will deflate. I've discussed this in greater detail at the link below.

Deal Junkie on February 05, 2009 8:45 AM said...

So supply doesn't mean anything? As long as debt is available, developers should just keeping on building, and then values will go up forever?

I read your post. In your post, you say "Home prices have dropped because the financing that people used to buy homes at an inflated price is no longer available, not because there are more homes than people are willing to occupy." Do you honestly believe that?

Kevin Kleen on February 05, 2009 10:48 AM said...

No, supply is definitely important too. Builders and construction should have cut back when it became apparent buyers were increasingly relying on 100% financing, teaser rate underwriting, etc., and that this demand was unsustainable.

Mulligan is arguing because there wasn't oversupply CRE values won't drop dramatically; I am arguing values will drop even though there is no apparent oversupply now, because aggresive CRE financing is no longer available, and because falling employment will lead to less demand for CRE space even though CRE does not appear to be overbuilt at this time.

I do think on the residential side the issue is not with demand for housing; population is still expanding, after all. I believe the problem is one of a mismatch between current prices and the ability of those who need it to pay. Aggressive underwriting, no doc loans, underwriting on teaser rates, etc. enabled many buyers to enter the market, and now that such financing is no longer available the houses that were built to meet that demand have no buyers. The market won't stabilize until employment growth gets back on track and prices adjust to levels that buyers with properly underwritten financing can afford.

Dike Drummond MD CPC on February 10, 2009 6:27 PM said...

Supply means a lot ... however we are talking a general supply figure here. All real estate is location and market specific.

You can find - right now - Commercial Asset Types in favorable markets that are doing well and will only perform even more profitably in the months ahead due to falling prices in our national recession.

Example: there is no supply and demand imbalance in Multifamily in most TX markets. The supply bubble was years ago and the recession in leading to very low starts. The national statistics you quote here are not necessarilty true at the local market level.

Keep your eyes open for Commercial Deals that make sense ... they are out there.

My two cents,


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