Commercial real estate follows the general economy, but there are some factors that influence this market more than others.
The unemployment rate is closely tied to commercial real estate. If businesses are hiring more employees, they need a place to put them.
Job creation leads directly to higher demand for commercial real estate. This is different than an increase in sales which can be accomplished, and right now is, without adding people.
The Timing of the Recession
The recovery from this recession, and commercial real estate’s dip, is going to be slow. It will be measured in years not months. Increasing national debt, and coming inflation, will likely slow recovery even more.
Washington State, in general, is in better shape than many other places in the U.S. with the recession not as deep. Although Thurston County mirrors this trend, the recession is expected to last longer here. State government, the largest employer in our area, lags private industry in when recessionary impacts are most felt.
Last year and this, private businesses made significant adjustments to operations and laid-off employees as needed. Real state government cutbacks and layoffs have just started and many more are expected in 2011.
Leasing and Property Management
The vacancy rates among commercial properties — about 15% for both office and retail space — are almost triple what they were three years ago. Though high, these numbers are better than in many part of the country, particularly the southwest. Locally, successful companies like Townsend Security show us there are businesses that are growing, expanding and leasing commercial space.
On another positive note, vacancy rates have remained low for investment residential properties, typically multifamily rentals that are not occupied by the owner.
Sales: Users verses Investors
There are two types of commercial buyers: 1) Those who will be “using” or occupying the building and 2) Those buying it strictly as an investment.
Most purchases at this point are by users who are only buying what they need. Because of this, purchases are for smaller spaces and at lower prices compared to past years.
Sales from investment buyers are scare. This segment anticipates the real estate market dropping a bit further, and is trying to time their purchases for the lowest point.
Although residential foreclosures have been in the news for quite some time, commercial foreclosures are just beginning.
The primary concern for financial institutions is getting back money they loaned. When banks own properties because of repossession, they’re motivated to discount them for quick sale. This discounting deflates the entire market. Commercial foreclosures will likely be a common occurrence in both 2011 and 2012.
The Takeaway…
Now more than ever it’s important to remember real estate is a long term investment. The Rants Group has always operated on this principle. Those who consistently maintain properties, and take care of tenants, will see good profits from their assets over time.
About the Author
Pat joined The Rants Group in 1988. He is currently the President and runs the day to day operations. He develops, sells, leases and manages office, retail and industrial properties. He received his Business Administration/Finance degree from Central Washington University. Pat served as past President of The Rotary Club of Olympia and Community Youth Services. He is also on the Board of St. Martins University and the Economic Development Council. Pat is married to Helen Rants and has three children.
