The commercial real estate market vs. signs of a strengthening economy

We asked our head of Real Estate, Jonathan Sorkenn, to comment on what he is seeing as the current state of commercial real estate. He offers an outlook that is a bit at odds with current US economic trends we are seeing right now.

With the U.S. economy slowly picking up steam and the stock market nearing historic highs, it seems logical to many that the commercial real estate market will recover all the lost value from the last recession. With interest rates at historic lows, there has been a flight to quality relative to commercial real estate. Well-located and leased office, retail, industrial and multi-family properties have continued to drive transaction volume. Cap-rate compression for the best assets continues unabated as investors hunger for yield.

All is not well, however, within the industry. A disparity between the “haves” and “have nots” remains acute, with primary markets and metro areas (NY, Boston, Washington DC, San Francisco and Los Angeles) garnering pricing premium due to their higher barriers to entry for new supply. Suburban office, retail and older manufacturing facilities, especially in secondary and tertiary markets, continue to languish. With systemic changes underway relative to how (by price) and where (on-line) consumers shop, the amount of obsolete retail space will continue to grow.

With regard to workplace characteristics, traditional office users are adjusting (reducing) their occupancy needs to address the increased prevalence of tele-commuting, virtual offices and smaller, collaborative office layouts. Especially in suburban markets, there is an abundance of Class B & C office space that will likely become redundant. Regarding older, former manufacturing facilities, no amount of On-Shoring will be able to compensate for many poorly-located, obsolete and often environmentally-tainted properties. What can an owner or a tenant, subject to a lease, do to mitigate their financial exposure? The conventional plan of action is to market the facility for sale or sublease. Unfortunately, there are many instances where the mere drastic reduction in price is not effective in generating demand for these challenging assets.

One alternative that continues to gain traction for retailers and manufacturers is using a portion of their existing expenditures to recapture what would otherwise be an unrecoverable loss on a surplus property disposition. Corporate Trade or Barter companies, such as Evergreen-Partners, can pay a significant premium price relative to the cash market value for these assets. Effectively, the Trade company is the conduit that allows companies to use their impaired real estate as partial payment for their invoices on advertising and other business services.

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