Will Commercial Real Estate follow the Residential Decline?

By
Commercial Real Estate Agent

Depends on who you talk to, however the short answer is NO and here's why.

Each are affected differently, and following is a brief description.

   The market value of commercial real estate is determined by the state of employment and interest rates. Commercial real estate is a business with a profit and loss statement. Hopefully, that profit and loss number is positive and provides cash flow. That number is then transitioned into a capitalization rate and is used as a comparison against other yields of equities and debt.

The value of residential property is also determined by employment and interest rates. However, there is no profit and loss statement for residential real estate and it is not a business. The state of employment and interest rates affect the supply/demand relationship of residential property. That supply/demand relation is stabilized by comparisons between the cost of owning versus the cost of renting.

Currently on the residential side there is a large disparity in rent versus owning and until that number inches closer it is likely we will continue to stay in a Buyer's Market.  If landlords raise rents, then likely the demand for residential homes will rise thus causing a Seller's Market.

 Most of the commercial investments are based on cash on cash return - for the amount down, how much do I receive annually?  Typically an investment at an 8-9 cap rate will be financed around 7% and actually create a cash on cash return of around 10-15%.  No matter what market we are in investors will be interested in these returns as they cannot get this from stocks, bonds or mutual funds with any sort of guarantee.

 

Ryan Haddock

www.soundadvisors.net

Comments (7)

Ernie Cabrera
REAL ESTATE AMERICA - Ernie Cabrera - Elk Grove, CA
Real Estate America
Ryan, nice blog and informative.  The commercial market in my area is still hot, but we are see a slow down because the vacancy factor is increasing.  I do believe that many investors are getting out of residential and moving to commercial.  Best wishes!
Nov 10, 2007 09:05 AM
Anonymous
Schar
I think you are right. Only because as the residential boom goes busts people are still going to need a place to live. Apartments!!!!
Apr 15, 2008 11:16 AM
#2
Richard Sweum
1st Security Bank - Everett, WA
Smaller commercial projects typically rely on "retail" or "consumer based" businesses to occupy their spots, and these businesses are the first to fail in a faltering economy, which locally...we are doing fine.  Check out commercial real estate in AZ, FL, OH, and you will see some interesting things going on.  Longer term financing is harder to get for commercial ventures, but short term financing is still readily available.  I think that 4th quarter of 2008, 1st quarter of 2009 will show signs of distress in the commercial real estate market in the Puget Sound.  Thankfully, there hasn't been HUGE supply increases like we have seen in residential housing in this area, that should help minimize the pain.
Apr 16, 2008 02:56 AM
Abe Do
Olympia, WA

Great point Rich.....I would agree that since writing this blog things have changed a bit in the commercial world.  One of the largest problems I am seeing is how the credit crunch affects equipment financing and other smaller loans that businesses rely on.  Small business owners definitely are getting hit, I own a business in a local strip center and both tenants next to me have recently moved out creating a huge vacancy.

One thing is for certain the only booming item in Puget Sound right now is the apartment sector where we are seeing larger complexes selling at close to $125K per unit.  Rents are also edging up but not nearly fast enough to cover the disparity.

 

Apr 16, 2008 03:04 AM
Richard Sweum
1st Security Bank - Everett, WA
Those folks that went nuts on condo-conversion applications and are partially completed are kicking themselves at this point.
Apr 16, 2008 04:59 AM
Keith Fritz
DHR Info - Coral Springs, FL

OMG!! You guys are so right.

One of the things I did was join an affordable commercial real estate listing site BuilderBrokerNetwork.com for only $59.99 you can post as many Active Listings and Wants/Needs ePostings as you want. Basically, the company I work for stop paying for my marketing because things are getting tight so I had to readjust and luckily I found BuilderBrokerNetwork.com

Jul 01, 2008 07:36 AM
Colleen Fischesser Northwest Property Shop
RE/MAX Advantage | Managing Broker - Chelan, WA
A Tradition of Trust in the Pacific NW since 1990!

Nice to have a commercial slant here in the group!

Jul 01, 2008 04:33 PM

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