Why Commercial Real Estate is Strong in 2008
Unless you've been living on Mars, you've heard horror stories about the subprime mortgage melt down, and the hazards of a debt-fueled bubble and unrestrained mortgage lending. If you're a commercial real estate investor, one of the operative questions is "Will this impact me?"
The short answer is "Yes, but not as badly as you might think." First of all, there's some compartmentalization in the real estate debt industry, and more importantly, the odious concept of "third party mortgage broker" was laughed out of the commercial real estate market post haste. (Most commercial real estate lenders are insurance companies, who are looking for long term returns and asset preservation, rather than trying to make a quick turn. What this means for you is that while credit lines for home loans (and shady, shaky, bizarre home loan products and derivatives based on home loan products) are getting mulched, loans remain strong for commercial real estate investors.
Indeed, because most banks are taking a bath on bad debt, they're actively looking for nice, stable business to business loans. From the financial services sector, commercial real estate loans are a good deal; the people who take them out have established credit ratings, and they have an income stream (from leasing and resale) that keeps the cash flow positive, which helps the banks avoid liquidity issues, such as the one that sunk Bear Stearns. Because you're working directly with the bank, you have a much greater level of surety in getting your commercial real estate loan.
On top of that, there are some hopeful signs for commercial real estate as a segment. The house construction boom burst in late 2006; the mortgage melt down was written clearly on the wall in the spring of 2007…yet new office space starts went up around 15% as of the third quarter of last year. (That growth wasn't repeated in the fourth quarter, as more investors took a wait and see attitude.)
The people who invest in US commercial real estate are people looking for long-term holdings and revenue streams rather than "flippers". Commercial real estate is a good longer term, low risk core investment, and the sort of investment that companies trying to preserve assets move into. Likewise, because of the weak US dollar, commercial real estate investing in the US is appealing to foreign interests and sovereign funds. Furthermore, beyond the shambles the dollar is in, the United States is still an appealing investment target for commercial real estate. It's still the largest economy in the world, and it's still the engine of innovation and entrepreneurship. It's easier to start a business in the US than nearly anywhere else in the world, which means that it's easier for a commercial real estate investor to find tenants to cover the cost of the mortgage. The US's comparatively light regulatory burden (compared to Europe), and near total transparency in banking laws (compared to Asia) make it appealing for a number of solid reasons.
Most of those investors are looking to get some return on their capital, which furthers the appeal of business related real estate investing. This growth potential is already being actualized – in dollar amounts, commercial real estate demand grew by 40 billion dollars last year…. however, in order to capitalize on it, you're going to need to work harder structuring the mortgage and payment agreements. You'll have to ask more questions, and provide a greater proof of assets to get competitive rates, just because investors are (justifiably) skittish after seeing the credit markets implode.
On the flip side, that kind of conservative investment strategy will help you in the long term, as market corrections won't sink your commercial real estate ventures.
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