Believable Hype Or Just the Same Old Smoke & Mirrors?

Believable Hype Or Just the Same Old Smoke & Mirrors?
By: Nicholas A. Dunlap, CPM

Could it be that all this talk about a Commercial Real Estate bust is just that? Outlook and Statistics released this week by a number of sources, including TD Bank, the National Association of Realtors and CSUF’s School of Economics certainly bode well for property owners and real estate investors nationwide approaching a future that is rumored to have more than $1.4 trillion dollars in debt coming due prior to 2014.

The Financial Institution’s Perspective

Sure, TD Bank is one of many banks that issued Commercial loans, however, the model that TD followed, according to TD Bank CEO Bharat Masrani is a conservative one that will keep them out of trouble. Anyone who has applied for financing in the past two years certainly notices an increase in regulation, however, Masrani feels that his firms conservative lending practices will deliver them from evil, or in this case, distress. In a business built on risk taking, Masrani said that TD stuck to their footprint and did not meddle in property types they were unfamiliar with. Based on their practices, he feels that a Commercial Real Estate bust is not in our near future, although specific property types in a number of local markets may be hit hard.

The Economist’s Outlook

Although it has at times been nasty, multifamily has outperformed other product types through the downturn and will continue to do so through 2011. Jobs are slowly being created and bringing with them the need for workforce housing. Additionally, California State University Fullerton released their first quarter Southern California Economic Indicator and cited a 0.87% increase in economic activity. CSUF Economist Adrian Fleissig feels this will also result in an additional increase over the next 6 months and that we are on the road to recovery so long as the number of jobs continues to increase as well.

The Industry Watchdog’s Outlook

Financial performance of these (property types) assets is bolstered by improving rental figures and occupancy rates. According to Lawrence Yun, Chief Economist for the National Association of Realtors, multifamily is the strongest sector of the marketplace. While there have been a number of new projects introduced to the market, Yun feels that rents may decline by as much as 1.5% through the end of 2010, but will climb back 1.2% in 2011. Nationwide, the vacancy rate is expected to decline from 7.3% to 6.3%.

The Boots On the Ground Outlook

Marketing and leasing activity has picked up tremendously on the two major product types we own and operate: office and multi-family. In fact, last week was a record week for us in which we processed and approved 15 rental applications, both for residential and office. A typical week consists of half that amount, and until late, the only calls for office space were “wheeler-dealer”, promo seekers with no true concept of rental rates, concessions or value. Now, we are seeing multiple-year lease terms taken with fair concessions for both parties.

With the increase in activity, we have seen a slight increase in market rates. In most residential rental markets, with the exception of new class A product, the days of paying and begging for move-ins are over.

The Wrap-up

While the data and statistics certainly bode well for real estate investors and operators, I feel that we will still see some sort of market correction. It is important to remember that not all financial institutions were as prudent or conservative in their commercial lending practices as TD Bank was. We know what happened with the residential market, so unless the Federal Government issues a mandate of sorts to extend in-place financing on performing assets when the loans come due, this $1.4 trillion dollar amount will become a huge factor.

For those of us who are not highly leveraged, cash flow will continue to improve and a sense of normalcy should return to the market. In Orange County, I feel it has already.