Like much of the US economy, the commercial real estate market has been in decline in recent years. However, according to Moody’s Investor Service, US commercial retail prices have seen modest increases from November 2009 to January 2010. This is from a record low in October 2009. Is this the start of a recovery for commercial real estate, and in particular, what is the trend in the Minneapolis area? The following are opinions given by two real estate agents, who have a combined 45 years of experience in commercial real estate.
What is the current situation in your opinion?
First, it’s important to understand that the problems of commercial real estate are not the same as those of the current residential real estate crisis. The residential real estate crisis was caused by a large amount of bad debt allowed by too lax rating standards. There is no such thing as bad debt in business; instead, many companies went under due to a long and deep recession, thus creating much more inventory on the market. The rate of companies going bankrupt has apparently slowed down and it looks like most of the companies that are still in business are going to survive. Many of the largest corporations have actually improved their cash situation. There is no “poison” debt that has yet to “go away” like residential real estate. However, this does not mean that we will not continue to see commercial foreclosures due to the economy. The economy must continue to improve so that companies can start investing again. We believe that the worst is over, in fact, for the first time in several months we have seen some activity from the user (companies looking to buy or lease). Before that, all the activity was from companies looking to sell or lease space. This does not mean that we expect to see things boom anytime soon. Even companies that are in good financial shape are more reluctant to make a move right now, because there is still so much uncertainty. We see the buying process taking much longer and shorter term lease commitments being made than in the past. Many reports we see suggest that money will start flowing into commercial real estate again in late 2010.
What are some of the major factors that could affect recovery?
An important factor is fear. Companies are afraid to make big moves right now. If the economy continues to improve, we think there could be a significant pickup in acquisition activity as companies gain confidence. The industrial and retail sector tends to lead a recovery, while office space tends to follow. We need to see continued strength in retail sales for retail properties to start moving. There are a significant number of “big boxes” (ie large retail outlets or distribution spaces) on the market right now. Retailers and distributors are going to think hard about purchasing a 450,000 square foot facility. We see these types of properties sitting vacant for a long time unless someone finds creative ways to use them.
Are there still good “deals” in terms of property acquisition?
Rental rates are still at an all time low. Even if average prices have gone up slightly across the country, we think you should be able to get rock bottom or very close to rock bottom rates. Now would be a great time to negotiate some long-term lease rates.
How is the Minneapolis/St. Paul area compared to the rest of the nation?
While things have slowed down significantly in this region, we are not seeing the devastating situation that Detroit is seeing with the downturn in the auto industry. We also see New York, San Francisco and Washington DC as more affected than Minneapolis. The Twin City area has a great deal of diversity and has a high concentration of businesses in healthcare and medical technology. These markets tend to do better in downturns than other industries. There is a chance that the Twin Cities will experience a strong economic recovery before many other regions of the country.
When was the last time commercial real estate was handled?
The mid-1990s to the early 2000s were great times for commercial real estate. After 9/11 there was a great recession. Commercial real estate rallied between 2003 and 2005 and actually boomed for the 2 years prior to the October 2008 stock market crash.
When do you think it will prosper again??
We believe that the industrial sector of this economy needs to expand significantly in order for us to see the kind of activity that was seen during the 1990s. The dot-com boom in the late 1990s created a huge expansion in the technology sector. When industry prospers, the demand for warehousing and manufacturing space increases. Office space follows as growing companies expand their support functions. The jobs created by the industry stimulate the retail industry, which continues to drive economic growth.
The medical technology sector could be one segment that could help commercial real estate in the Minneapolis area. While this area has been weaker of late, the US (and the rest of the world) population continues to age and should spur more demand for medical technology and healthcare products. Additionally, the drive to reduce healthcare costs could create greater demand for technology to improve efficiency. The medical industry is one of the few industries where nearly 100% of its manufacturing is still in the US, so a boom in the medtech space could lead to needs for warehousing, manufacturing space, and more office space.