This is the lead-in for a client newsletter item I wrote in November 2008. Reading it now, I remember how disappointed I was with my conclusions. Commercial roperty values and investment opportunities certainly have changed. I wish I had been less right in my forecast...
November 22, 2008
In the next few years, it is likely that more property owners will go broke and more will get wealthy than in any similar period in recent history. The challenge is to make the right decisions to stay out of the former group, and squarely in the latter.
Commercial property values continue to reset downward. From unimproved land to Class A office space and every property type in between, values have fallen and can be expected to continue. This trend is a function of the economic considerations of income production vs income potential, debt coverage vs projected appreciation, and replacement cost vs inflated market rates. These realities will have very different yet interdependent meanings for tenants, owner/users, and investors.
TENANTS will seek to reduce expense in the face of reduced earnings. Increased vacancies are creating greater opportunities to right-size their businesses into aggressively priced space. Shopping for the best deal in an inventory rich market is already the norm.
OWNER/USERS may experience one or both of 2 financial crisis; debt greater than value, and inability to obtain financing. Many will require proactive measures by owners and lenders to work-out modified loan terms while others will go back to the first note holder.
INVESTORS should be juggling the cash flow, expense, and future values of their properties to ensure financial stability. Retaining tenants and filling vacancies will become more critical and also more difficult as today's cash flows strive to satisfy yesterday's debt obligations.