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Investors Determined to Overcome New Depths

Commercial real estate has yet to see bottom, but investors committed to this asset class are determined to overcome the depths of this recession and the challenges facing the industry. As noted in the current issue of the RERC Real Estate Report, the losses in this recession appear to be more severe than what the industry suffered in the 1990s. click here to purchase

In the 1990s, prices declined 30 to 35 percent over 5 or 6 years, which was bad enough. However, the crisis we find ourselves in today is happening at an accelerated pace, with real estate prices having fallen 20 to 25 percent on a free and clear basis in just the last 3 quarters! The speed at which this recession has deepened, and the severity of its damage, have shocked us all, from the federal government on down.

Although we are seeing some progress in the housing industry, there is much unraveling yet to be done at Fannie Mae and Freddie Mac, more home foreclosures ahead, and probably lower home prices yet to come. In addition, the stress tests administered to the large investment houses have not reflected well on the banks' overall health, and despite some first quarter profits, there are still worrisome piles of legacy/toxic assets on their books that must be disposed of somehow. In addition, the auto industry is at a breaking point, and with the bankruptcy of Chrysler, there are fears that the bankruptcy of General Motors cannot be far behind. An average of 45 percent fewer cars and light trucks were sold by the Big Three last year than in the previous year, and it is no wonder that this situation, added to their other costs of doing business, may mean the end of this industry as we know it. When we consider the ripple effect on all the auto parts suppliers, one can get an idea of the additional jobs that are likely to be lost before this is over.

As always, it is the loss of jobs that will have the longest-lasting impact on commercial real estate. With unemployment expected to increase at least throughout 2009, the damage to real estate fundamentals will increase accordingly, with higher vacancy, negative absorption, declining rents, and decreased values. It will be some time before we see the bottom of the commercial real estate market and know exactly what it is we have to deal with, but the majority of real estate investors remain determined to work through and overcome the new depths associated with this crisis.