Dr. Sam Chandan, Global Chief Economist and Executive Vice President of Real Capital Analytics and an adjunct professor of real estate at the Wharton School, is quickly becoming one of my favorite speakers on commercial real estate. He is constantly speaking at conferences and is one of the foremost authorities to speak on the state of the commercial real estate market. In a recent Bloomberg interview Dr. Chandan shared some of his thoughts on the market. Here’s what he had to say.
Also, I implore you to check out Dr. Chadan’s blog and follow him on twitter.
Sam Chandan
- I think it will take a long time for vacancy rates to peak. If you look at the last downturn, the recession ended in 2001 and we didn’t reach peak vacancy rates until late 2003 and early 2004.
- For vacancy rates to stabilize we need meaningful job growth, we need to replace the jobs that we lost, and we need for companies to believe that growth and jobs will continue in a way that requires them to sign leases for more space. History suggests that is still a ways away.
- If we look at investment sales, in some of the most liquid markets like New York, Washington D.C., and L.A. there are a large number of potential investors both foreign and domestic and they’ve grown frustrated by an absence of deep discounts on distressed property sales, so we see that they’ve been bidding for assets in a way that has supported stabilization of prizes.
- If you look at the Moody’s CPPI Index, you’ll see that for 3 months in a row we’ve had either modest improvement in prices or relatively stable prices in some of those leading metropolitan areas.
- Part of the drag on prices right now, and an issue that we still have to contend with is that delinquency and default rates on commercial mortgages continue to climb. We’re at a 16-year high right now and that’s going to continue to exert pressure on the ability of lenders to extend credit.
- There’s no shortfall of equity out there, particularly in the largest markets. People either foreign or domestic are ready to bid on assets and they’re looking for deep discounts. There hasn’t been a lot of product that’s come to market and with very few assets being made available for sale, the balance of supply and demand is putting some upward pressure on prices that’s allowed them to stabilize.
- Once you go outside the major metro areas, into the secondary or tertiary markets and some of the smaller metro markets, neither the equity nor the credit is to be found, so prices are still extraordinarily weak in some of those areas.
- As for the direction of pricing, I think a lot of the equity that’s been raised is an expectation of the fact that, with prices being so much lower, there’s the real potential that once fundamentals do improve, for property prices to rise in a way that yields some meaningful returns.
- You have a situation where if you are not facing any kind of constraint, if you don’t have any external pressure from debt structure that you have to bring your asset to market, then it’s clearly not the time to be a seller.
- Where you do have significant issues related to your debt structure, we know that from a policy prospective most of the actions of the FDIC and the Fed over the course of the last 6 or 7 months have been in part designed to slow this process down a little bit.
- Banks have a great deal of incentive right now to work with their borrowers to modify their loans and keep those loans on the balance sheet of the bank rather than foreclosing and bringing them to market.
- If interest rates rise in will be in part because of inflationary pressures.
- Over the long term inflation is going to support commercial real estate because of the hedging characteristics.
- In the short term, with vacancy rates rising, higher inflation is not going to be beneficial.
- People are looking at the rising inflation rates as they pertain to our ability to refinance.
- People are concerned whether or not it’s a high-quality asset, an asset in a good metropolitan market with strong demographics and drivers of demand for the space.
- You don’t want exposure to the market, so what we’re seeing is that there is a premium being paid for assets with a good quality tenant.
I agree with everything Dr. Chandan says, what do you think?
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