[Previous Entry: "Community Youth Benefit a Winner!"]
[Next Entry: "College Park Diamond"]
12/15/2007: "Is The Commercial Market Falling Apart?"
For a year or more I have been noticing some changes in the local commercial marketplace. Although hard data for small retail buildings is hard to come by it has seemed that small neighborhood strip centers were becoming more and more difficult to lease and vacancy rates were increasing.
| For several months I have heard grumbling among commercial property owners over the difficulties of leasing space and have seen centers constructed only a year or two ago go into foreclosure. Yet, sale prices continue to climb. Commercial land values have certainly held their own. I have seen recent sales in excess of $20 per square foot of land in both Clayton County and Henry County, almost unheard of on Atlanta's southside. But more and more I have felt like the market was ready for a correction. |  |
The commercial market and residential market has significant differences. Certainly, there are different motivations and they speak different languages, but when push comes to shove bad times with one usually means bad times with the other. Both the commercial and residential market are influenced by many of the same economic factors, just sometimes in different ways and at different times.
One significant difference is transaction time. A house put under contract today will usually close within 30 to 60 days. While this also can happen with commercial properties, they often can take six months, a year or even longer to close depending on the complexities of the transaction. This is particularly true with land when engineering must be completed, site plans developed, and zoning and other governmental approvals obtained. So, the prices we see on the commercial deals which closed yesterday were based on market conditions six months to a year ago, which were certainly much different than those which exist today.
It appears the current credit crises is beginning to affect commercial properties. Many retail and service businesses which have benefited by the prior brisk residential market are now suffering, particularly those related to construction and selling home furnishings. As a result some are curtailing expansion plans and closing under-performing locations.
Lenders are tightening up on their commercial loan practices by requiring more capital contribution by purchasers. Like with the residential market, this tends to limit the number of possible purchasers and limit the number of acquisitions that can be made by any specific purchaser.
CoStar, a leading commercial sales data company is now reporting a slight decline in commercial property sales prices, and many other experts in the industry are now predicting a downturn the in the commercial market.
The better properties will continue to be the better properties. The hot spots will slow down, but will still be the better locations. All commercial properties will not be affected equally. New anchored developments and their shadow properties will continue to demand the highest sales prices and rents. Some properties fare better in otherwise down markets and some suffer in otherwise good markets. Whether it be buildings or land, secondary and lesser locations will suffer the most as those who can take advantage of the marketplace to move up.
If you are considering relocating or expanding your business or want to pick up some pretty good investments today is the day you need to start looking.
Commercial tenants need to start watching for rent reductions in space superior to what they have now. If your business continues to prosper, over the next two years or so you may be able to move to a larger or better located property for the same or less money as you are now paying. When you think the market has hit the low point, consider negotiating a longer term lease with your landlord, this would help lock you in with lower rates as the recovery occurs.
Commercial property owners should work hard at keeping their current tenants happy, and try to negotiate upcoming lease renewals now, before the downturn progresses. Giving a little now might save you a lot in the near future. Just be careful not to tie yourself in so tight you can not take advantage of the recovery when it occurs.
The good news is that this all part of the economic cycle. There are peaks and there are valleys. Each time this has happened during my lifetime things have always came back much stronger than they were before. I have no reason to feel any different this time.
