Commercial Property Investment in ‘08

After record levels of growth, commercial real estate is facing a more challenging economic and investment environment than it has for several years. Despite the threat of recession, the U.S. economy can be resilient. Demographics are strong with solid population growth, and overall U.S. households are the wealthiest they have been in the country’s history, but job growth is a concern. The problems are America’s habit to “overspend”. Capital and financial markets are volatile, lower interest rates favors commercial investing.  

The lending crisis will gradually affect debt capital, which will force stricter lending guidelines which can effect resales. The second-tier properties may see larger cap rates as tenants re-evaluate their operating costs. The rental growth rate should be expected to decelerate and flatten out in some areas. Investors should take caution in highly leveraged purchases. Retail vacancy is up, with slower employment growth, rents should decrease in many areas.

Apartment complexes may see drastic changes as distressed condominiums compete for tenants. National Apartment markets were strong during 2007 as homebuyers faced lending challenges. Supply may begin to outpace demand as unsold homes and condominiums enter the market seeking income to offset unsold inventory. Demand should stay fairly steady throughout the year, but growth will likely slow as supply and demand reach equilibrium.

Commercial real estate has seen nothing but upside volatility for the past four years, and although it now is facing challenges, this asset class should hold its own as a solid investment. Make sure you are in the correct liquid position when purchasing, prepare yourself for monthly challenges.

Marc Tesla