Boom Time!

roullette wheelWell, maybe not just yet.

However, there is lots of anecdotal evidence that the market has certainly passed the “stabilizing” stage and is in an upward trajectory. Read what my old commercial broker pal, Peter Fischbach, said about office space in his booming St. Petersburg Fl market.

Certainly the brokerage community is all aflutter over the recent action and excited to see buyers in strength for the first time in years. Who can blame them? It has been a long drought and many once-successful CRE happy hour acquaintances have moved on and sworn off the commercial real estate market.

No CRE Crash in Sight

And I don’t see any caution flags signalling that the market is going to crash. In my career and studying the history of real estate booms and busts, I have come to believe that the crashes are brought on by credit abuse. For example, the housing crash starting in 2007 came about because of mortgages being given to wildly unqualified people who used the money to bid up housing prices.

Prior to that bust was the commercial real estate disaster in the ’80s when savings and loans were giving out money to commercial real estate developers in ridiculous quantities at ridiculous terms. These developers went on to overbuild and the excess capacity destroyed the market.

I don’t see any credit abuse. Yet. If you do, please get in touch by email and let’s discuss.

Speculators Are Active

However, the speculative juices are definitely beginning to seethe and bubble. Also known as momentum investing, this kind of buying relies on market appreciation to turn a profit on the investment.

I strongly advise against this. Instead, be a value investor. What’s that? It’s someone who does the math and figures out how to cash flow a commercial property and pay a price for the investment that makes the cash flow an acceptable return.

Chicago Attorney R. Kymn Harp nails it, “Invest with intentional regard to reliably building wealth though a well conceived value investing strategy not a roulette table strategy that, over time, is virtually certain to fail.

Read his blog, Value Investing vrs. Momentum Investing. Better yet, tattoo it on the back of your check-writing hand.

Office Space – A New Day in the Sun

New Office BuildingOffice space has definitely been a laggard in the real estate recover. Having slumped, stalled and then barely moved since the great crash in 2009, office space is showing signs of rising from the ashes and becoming a leader in the commercial real estate market.

According to the international commercial real estate firm, DTZ, office leasers grabbed up 70.2 million square feet in 2014. That kind of demand has not been around since 2006. Moreover rents have increased in 70 percent of major U.S. markets. (source: http://www.rejournals.com/2015/01/09/a-robust-office-sector-numbers-from-dtz-say-its-so/ )

Throughout the commercial real estate spectrum credit conditions are improving. According to a recent email from Trepp, the delinquency rate in commercial real estate loans in commercial mortgage backed securities dropped from 7.43 percent to 5.75 percent year-over-year in Dec. 2014. Fewer and fewer projects in all sectors are teetering.

So what does it all mean? My pal, Peter Fischbach, a commercial broker based in St. Petersburg in the Tampa Bay region thinks we are just seeing the beginning. “These kind of numbers are only interesting at this point to CRE nerds like you and I and a few savvy bankers. I think the trend, especially in office space, is just beginning.”

In spite of recent trends in downsizing due to technology, Fischbach cites the broader megatrends that have ruled the markets for centuries. “It should say this in the bible. In commerical real estate, ‘there is a time for downsizing; there is a time for growth.'”

Allowing more people to work from home, the diminishing need for lots of storage space due to digital storage, word processing displacing secretaries and other advancements have definitely trimmed the need for leased space. Think attorneys.

However, macro economic trends still hold sway. “We have been downsizing since 2007,” said Fischbach. “The trend has turned and will go on for a long time.”

He is seeing construction of new space, but it’s pricey. “In my town, where commercial real estate is generally booming, new office space is a bit more expensive than what is currently available. For example, quality space is available for lease in the mid-20s per square foot. New space is coming on in the low $30s.”

There are always tenants who want the newest and latest in space, he said. It used to be lawyers. “I’m not sure where that crowd is coming from this time around. It’ll be fun to find out.”