An Unbiased Look on the Biases of CRE’s Future

In an effort to be diplomatic, I’m going to address both the positive and negative aspects of the commercial real estate market that are currently being discussed by various sources. This is mainly an attempt to give you, the reader, an unbiased look at the biases currently the web. After outlining both positions, perhaps you’ll be able to form your own opinion on what you think the future of the CRE market will be. For now, I’ll start with the facts and later venture into the speculative.

Statistics from the first half of 2011 revealed a “sharpened appetite for commercial property,” reported the CoStar Group. The numbers were promising, showing an increased demand for properties, and consequently, a rise in values in nearly every aspect of the commercial sector. Investments have also grown a totaled 6.8% since last year, a result of renewed investor optimism for the value of commercial real estate. Office buildings have led the pack in 2011’s first two quarters, with a 17% increase in pricing, while buildings in the top 10 largest markets increased over 20%. This comes as no surprise to those of us keeping up on commercial news—the larger metropolitan areas have understandably grown much faster than their suburban counterparts this past year, likely due to the higher demand for prime locations.

While the residential real estate area remains decidedly weak, the industrial and multifamily properties also increased in value during the first two quarters. Based on this information, CoStar writer Randyl Drummer believes that because of the erratic behavior in the stock market, direct real estate investments might be viewed as a “safe haven, given the tangible nature of commercial real estate, and even lower alternative asset yields.” An excellent point as the first half of this year tends to lean toward a progressively positive swing for commercial real estate.

However, the flip side is also argued rather convincingly.

Retail Traffic seems to believe that the volatility in the stock market coupled with S&P’s credit downgrade will negatively affect progress in the commercial real estate sector. REITs have fallen a record 9% this past week, consumer spending is down and the job market remains in the tank. Uncertainty has become the major threat for commercial real estate, with corporations choosing to “sit on cash rather than invest or hire” and consumers deciding to save their money instead of spend. These factors, felt on a large scale, are horribly destructive to a struggling economy.

Standard & Poor’s was responsible for another controversial decision, this time regarding CMBS and pulling preliminary ratings on two transactions totaling over $2 billion. “They took a tenuous market and threw cold water on it” says one critic. Chris Macke, of CoStar, says, “Manufacturing, the service sector and unemployment are all trending in the wrong direction and then you add on top of that corporations and consumers holding back and the S&P downgrade and it just creates a lot of uncertainty.” This in mind, coupled with our overseas partners struggling to right their own economy, many believe that the budding CRE sector is in danger of slipping.

With a number of circumstances affecting which way the ball bounces, the best we can do is speculate. Which side of the fence do you fall on?