|
Will the subprime meltdown spell trouble for the commercial sector?
For a year or more now, the reports pertaining to commercial construction have been joyfully positive...especially when viewed in the light of the reports coming out on the residential construction sector. Last week (September 5th), Bloomberg.com ran a commercial construction 'update' titled Commercial Real Estate in U.S. Poised for Price Drop. Of course, I immediately investigated, and what I found surprised me.
Hui-yong Yu and David M. Levitt postulate that "U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales." Their reasoning stems from the estimates of several industry leaders, as well as concrete examples of deals being called off. "'There are so many deals falling apart,' said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, and owner of more than 20,000 apartments and 30 million square feet of office and retail space. 'People who can get out are getting out.'" Further evidencing this point of view is the Bloomberg Office Property Index, which fell 2.7 percent.
By far the most important point to realize, however, is that these negative projections are based largely on "fear in the system." In other words, "'You've got a lot of fear in the system from the capital markets,' said Martin Stein", CEO of the third-largest company by market value in the Bloomberg REIT Shopping Center Index (Regency). 'As far as the pricing of credit, it was greed six months ago and it's fear today.'"
While a thought-provoking and certainly valuable article, I have to disagree with the severity of its conclusions. While there may be minor price corrections here and there, commercial construction is ages away from the kind of price correcting happening in the homebuilding sector right now. Here is why:
- The Bloomberg article was released directly on the heels of a report from The Associated General Contractors of America (September 4th), in which their Chief Economist determined "Nonresidential construction shrugged off the turmoil in homebuilding and credit markets in July to post another solid gain." Furthermore, he noted that nonresidential spending climbed by 0.6 percent, posting its 10th consecutive monthly gain. "Private nonresidential construction--" he said, "the type that might seem most vulnerable to a credit pullback--showed no sign of contagion, rising 0.4 percent and July and 17 percent year-to-date." Even more notable is that "the three most speculative components--commercial, office and lodging--all advanced."
- The Fed's Beige Book, released the same day as the Bloomberg article, reported good, or at least steady, numbers in every market. "Commercial real estate and construction markets were generally stable to expanding across the Districts," it reports. "Vacancy rates are reported to be low or declining in most Districts, and rents are rising modestly in many." While several major cities (Boston, New York, Richmond, Chicago, Kansas City and Dallas) "noted some tightening of credit in the commercial real estate market," this was hardly a nation-wide trend, and did not seem to constrain the commercial construction sector at large, which is reported to still have strong "fundamentals". For example, New York reported that "Manhattan's office building purchase market remains strong, though some tightening in credit standards has put moderate downward pressure on prices; still a contact at a major leasing firm notes that purchase prices remain well ahead of this time last year."
- Reports in the past few months have been nothing but positive, reinforcing the claim that commercial construction is still fundamentally on solid ground. Check out this recent report on multi-family complex in Phoenix, this report on the National Association of Realtors' Commercial Real Estate Index, or this report on commercial construction stocks, suggesting that many are "yet to be fully priced."
Comment on this article by clicking here to visit the related post on ConstructionJobsBlog.com!
Please feel free to contact Mark Avera about this or any other article you read on this site at MAvera@TopBuildingJobs.com.
RECOMMEND THIS ARTICLE
You must be logged in
to recommend articles
|
