Posted by: Prashant Gopal on April 28
I wrote a story last week saying that the California Association of Realtors were readying to announce the first monthly home price rise in two years (one of a handful of signs that home prices might be bottoming). Turns out the median California home price did, indeed, increase by 2.2% in March compared to February, the Realtors group said April 28. But the $253,000 median was down 39% from March 2008.
To state an obvious fact, the very foundation of the North American commercial real estate industry is cracked. Overdue lease payments, credit shortages, and vacant storefronts are just some of the problems facing the downtrodden market. While the situation may worsen before it improves, Ross Moore of Colliers International provides hope of an upswing, possibly as early as 2010.
BF: How would you describe the current condition of North America’s commercial real estate market?
Moore: Although starting from a position of relative strength, most commercial real estate markets now are experiencing extremely weak leasing conditions characterized by rising vacancy levels and a softening in rents. Even businesses that to date have not been adversely affected by the economic downturn are expressing a reluctance to commit to new or additional premises. With working capital in short supply, firms that have leases expiring are choosing to renew rather than take on the expense of moving and associated costs. Many of these renewals are short term, highlighting the highly uncertain environment in which most companies find themselves. On the landlord or ownership side, with the debt markets highly constricted, financing is very difficult to source, which leads to real difficulties for many who must refinance anytime this year and possibly next. Real estate values across almost all regions and all property types are, as a result, falling at a rapid rate.
BF: What regions are experiencing the most difficulties? Can you identify any regions that are prospering during the real estate downturn?
Moore: Every region of the country now is experiencing difficulties, but to different degrees and for different reasons. The Sunbelt states of Florida, Arizona, Nevada and California are where weakness is most widespread. A housing depression characterizes these states, but sluggish business conditions now are evident across all sectors of the economy. Rents in these states are falling and demand for all types of space is well below trend.
The second depressed region is the Rustbelt states with Michigan being the epicenter, but extending through much of the Midwest. The auto sector is a key source of weakness for much of this region, but almost all economies with a heavy manufacturing bias are facing very challenging business conditions.
The third region is New York/New Jersey, with its high concentration of financial services jobs. Layoffs among many of the investment banks remain elevated and businesses of all types are scaling back where possible.
Texas, and Portland and Seattle in the Northwest, are two regions which only began to slow recently and are expected to outperform the country measured against most metrics.
The increase is encouraging, but it will have to happen consistently before it is safe to call a bottom in California. The unemployment rate is rising and more foreclosures are expected in coming months. So, prices could easily head back down into negative territory.