Like much of the US economy, the commercial real estate market has been in decline for the past few years. However, according to Moody’s Investor Service, commercial retail prices in the United States increased slightly from November 2009 to January 2010. This is an all-time low in October 2009. Is this the start of a recovery for the commercial real estate and, in particular, what is the trend in the Minneapolis area? Here are the opinions of two real estate agents, who combine 45 years of experience in commercial real estate.
What is the current situation according to you?
First, it’s important to understand that the problems in commercial real estate are not the same as the current residential real estate crisis. The residential real estate crisis was caused by many bad debts allowed by too lax qualification standards. There are no such bad debts in the trade; instead, many companies went bankrupt due to a long, deep recession, creating a lot more inventory in the market. The pace of business failures has apparently slowed and it looks like most businesses still in operation will survive. Many of the larger corporations have actually improved their cash position. There is no “poisoned” debt that has yet to “work its way” like in residential real estate. However, that doesn’t mean we still won’t see commercial foreclosures due to the economy. The economy must continue to improve so that businesses can start investing again. We think the worst is over, in fact for the first time in several months we actually saw a little activity on the user side (businesses looking to buy or rent). Previously, all activities were carried out by companies looking to sell or rent space. That doesn’t mean we expect things to explode anytime soon. Even companies in good financial health are more reluctant to move at this time, as there is still a lot of uncertainty. We are finding that the buying process is taking much longer and rental commitments are being made for shorter terms than in the past. Many of the reports we see suggest that the money will start to come back into commercial real estate by the end of 2010.
What are the main factors that could affect a recovery?
An important factor is fear. Companies are afraid to make major changes right now. If the economy continues to improve, we believe there could be a significant increase in acquisition activity as companies gain confidence. The industrial and retail sector tends to lead a recovery while office space tends to follow. We need to see a continued strengthening of retail sales for commercial properties to start moving. There are a significant number of “superstores” (i.e. large retail outlets or distribution spaces) that are currently on the market. Retailers and distributors will think long and hard before acquiring a 450,000 square foot facility. We see these types of vacant properties for a very long time unless someone finds creative ways to use them.
Are there still good “bargains” when it comes to buying real estate?
Rental rates are always at the lowest. Even though average prices have risen slightly nationally, we think you should be able to get low or very close to low rates. Now would be an excellent time to negotiate long-term rental rates.
How is the Minneapolis/St. Paul’s area relative to the rest of the nation?
Although things have slowed considerably in this region, we don’t see the devastating situation Detroit is experiencing with the downturn in the auto industry. We also consider New York, San Francisco and Washington DC to be harder hit than Minneapolis. The Twin City area has good diversity and a high concentration of healthcare and medical technology businesses. These markets tend to fare better in recessions than other sectors. It is possible that the Twin Cities will see a strong economic recovery sooner than many other parts of the country.
When was the last time commercial real estate was booming?
The mid-1990s to early 2000s were very good times for commercial real estate. After 9/11, a big downturn happened. Commercial real estate recovered between 2003 and 2005 and was actually booming for 2 years before the stock market crash of October 2008.
When do you think it will start thriving again?
We believe that the industrial sector of this economy needs to grow significantly for us to see the type of activity seen during the 1990s. The dotcom boom in the late 90s created a huge expansion in the sector of technology. When the industry thrives, the demand for warehouse and manufacturing space increases. Office space follows as growing businesses expand their support functions. The jobs created by the industry stimulate the retail trade which continues to fuel economic growth.
The medical technology sector could be a segment that could help commercial real estate in the Minneapolis area. Although this area has been weaker of late, the population of the United States (and the rest of the world) continues to age and is expected to drive stronger demand for medical technologies and healthcare products. Additionally, the drive to reduce healthcare costs could create greater demand for technology to improve efficiency. Medical is one of the few industries where virtually 100% of its manufacturing is still done in the United States, so a boom in medical technology could generate needs for warehousing, manufacturing space, and more. of office space.