At the annual New England CCIM Chapter meeting in Burlington last week, I had the opportunity to present a discussion on the future of commercial real estate values. The following executive summary attempts to provide some color to the Commercial Property’s Future presentation (37 KB PDF) that I prepared for the event.
I noted that all recoveries are really jobless as industry gains business and then hires as opposed to hiring and then hoping for more business. Ultimately, the employment environment trickles through all sectors of commercial real estate – depressing values.
The increased savings rate, while overall good for the economy in the long run, currently takes billions of dollars out of the economy which otherwise might have been spent on consumer goods and services (70% of our economy). This along with job loss and employee angst will keep a lid on retail sales.
A bright spot is that retailers and manufactures are keeping their inventory low and shortly will have to restock – meaning an increase in manufacturing and distribution with a positive effect in demand for warehouse space. However, if the economy has not picked up by then this may be a short lived increased demand.
The mantra in the financial sectors has been ‘extend and pretend‘ – kick the can down the road. If we don’t mark our borrower’s assets to market then we don’t have to recognize a decline in value and a technical default (even if they are paying) as the loan to values (LTV) are too high, the debt coverage is not there, and many of the mortgage covenants have been broken. However, this extend and pretend behavior cannot go on forever, and when the market values are reported, commercial loans will have even more problems as borrowers will not be able to refinance existing debt and will have to either kick in more equity and/or pay down the loan. What lenders will step into this void?
The landlord’s Catch 22 (after the Joseph Heller novel about trying to get out of the service by saying you are crazy, but if you know you are crazy then you can’t be) for those attempting to develop is that the landlord needs signed leases to get a loan, but the tenant needs the assurance that the project will go forward as evidenced by a loan in place before they are willing to commit to a project. Which comes first the chicken or the egg?
My predictions as to value, peak to trough are for Boston: Homes -25%; Retail -40%; Industrial -40%; Office -35% and Lodging -55%. Nationwide, I see home prices declining even further unless the administration extends the home buyer programs (which just recently made it through the Senate and House) in some form and commercial office real estate declining further due to depressed rents and economic uncertainty. At a national level, homes -35% and office -45%, while the remainder of the segments are in line with Boston.
Keith Munsell 
