April 18, 2016

A change coming in the commercial real estate market?

Posted in Keith Knutsson, Real Estate at 7:27 am by Keith Knutsson

A change is in the air. I can feel it. We have experienced a rather robust commercial real estate market since 2010 and a heated market since January 2013. But my senses tell me that our market is changing.

Why do I channel this premonition you may ask? I look at four metrics – residential activity, inbound calls, buyer/tenant reaction, and lender behavior.

This is an unscientific opinion and not based on any empirical data – just a guy reading the tea leaves; someone who has seen his fair share of commercial real estate activity for the past four decades.

Residential activity

I bumped into a young residential agent and friend of mine a few weeks ago and asked how things were going with his practice. I expected to hear “things have never been better, we are sooo busy, etc.” What he said startled me: we have a lack of entry level homes, affordability is at an all-time low; there is no place for trade-up buyers to move; banks are behaving conservatively (he actually said “getting a loan these days is a nightmare”). I marked the date carefully, as my experience suggests we would encounter a similar slowdown in six to nine months.

Inbound call activity

Signs, listings in the multiples, social media, newspaper columns, internet ads. All are meant to generate inbound call activity from potential occupants and cooperating brokers. The holidays are traditionally slow. But once the calendar dawns a new year and folks get back to work, the calls start with a vengeance. Not this year. This January was fraught with China’s implosion, the stock market declines, the presidential primary season, and plunging commodity prices. Call volume this year has been tepid at best.

Buyer/tenant reaction

In a healthy market a buyer or tenant outlines their wish list: find a building with X amount of square footage, this percentage of office space and in this location. We then busy ourselves finding said building.

Once found, the properly motivated occupant submits an offer and negotiations soon result in a new home for the business. Today, we see a lack of reaction even when the seemingly perfect opportunity arises. My suspicion is that something in the business owner’s crystal ball is causing concern. Possibly sales are flat, his industry is contracting, a piece of business he counted on cratered, or he is uncomfortable with prices. Regardless, this lack of reaction portends a changing market.

Lender behavior

In 2008, leading up to the great recession, we witnessed a change in the way banks underwrote loans. In the freewheeling years preceding 2008, we were spoiled. A bank might look at a business’ customer that represented a big piece of sales and assume it wasn’t a deal killer if there were long term agreements in place. As 2008 progressed, banks became concerned with the business’ ability to repay if the customer was lost. Beginning in 2011, lenders loosened their restrictions. Recently, we have noticed a shift back toward conservative underwriting. Now, as in 2008, lenders seem to look for reasons not to loan vs. reasons to loan.

But what about all of the contradicting data? Folks asked the same question at the beginning of 2008 as we sped toward the cliff a’la “Thelma & Louise.” Am I predicting a catastrophic end to this year? No, but there are enough data points to cause a bit of concern and proceed cautiously through the next few months.

Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714.564.7104 or abuchanan@lee-associates.com. His website is http://www.allencbuchanan.com

Source: http://www.ocregister.com/articles/market-711925-activity-business.html

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