Friday, April 8, 2016

Is the Commercial Real Estate Market Changing?

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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 of 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 which I will discuss in detail, residential activity, inbound calls, buyer/tenant reaction, and lender behavior.

Spoiler alert. This is an unscientific opinion and not based upon any empirical data - just a guy, reading the tea leaves, that has seen his fair share of commercial real estate activity for the past four decades.

Residential activity. I bumped into a young residential friend of mine a few weeks ago and asked how things were going with his practice. We receive his monthly collateral and it would appear as though he is killing it. 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 slow down in six to nine months.

Inbound call activity. Signs, listings in the multiples, social media, newspaper columns, internet ads. All are meant to generate in bound 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, 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 me a building with this amount of square footage, this percentage of office space in this location and I am a player." 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 causes concern. Possibly sales are flat, his industry is contracting, a piece of business he counted on cratered, he is uncomfortable with prices, or something unspoken. 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. After the freewheeling years preceding 2008, we were spoiled. In prior years, a bank might look at a businesses customer that represented a big chunk of a businesses sales and assume it wasn't a deal killer if there were long term agreements in place with the customer. As 2008 progressed, banks became concerned with the businesses 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 ala Thelma and 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.