Prediction is difficult, especially of the future.
–Mark Twain (also attributed to Physicist Niels Bohr)
Regardless of whether it was Mark Twain or Neils Bohr who coined this witticism, prediction is both difficult and imprecise. The challenge of accurate prediction is compounded by the world economic crisis we find ourselves in, a new administration entering the White House and global climate change. As daunting as the task is, owners and users of commercial properties make better decisions when they understand the key economic and financial drivers. To this end, here are three significant trends impacting commercial real estate in 2009.
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Continued Turbulence in the Equity Markets. Expect continued wide swings in the stock and bond markets. Real estate lending funded through commercial mortgage-backed securities (CMBS) which seized-up in 2008 and will remain largely frozen through 2009. Commercial banks will play a much larger role in financing commercial real estate, albeit with very conservative underwriting criteria. Office, industrial and retail tenants with good payment histories will demand and receive more leasing concessions as landlords seek to minimize vacancies created through the economic contraction. Excellent buying opportunities will abound for real estate investors with cash and good lender relationships.
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The Effect of Obama on Commercial Real Estate. On the whole, the Obama administration will be good for commercial real estate. President-elect Obama has set the goal of creating 2.5-million jobs over the first two year of his administration through investment infrastructure and alternative energy. Improved roads, bridges and transit projects will benefit the commercial building they serve. The federal government’s investment in solar, wind and other alternative energy will create ‘green-collar’ jobs utilizing office and industrial space, and will help commercial landlords and tenants lock-in stable energy costs.
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U.S. to Assume Leadership Role in Addressing Climate Change. Under the Obama administration, the U.S.will join other industrialized nations in seeking ways to cooperatively reduce greenhouse emissions which are accelerating climate change. In addition, forward looking cities such as Boulder, Colorado are already adopting building codes which require far more stringent energy efficiency in commercial construction and renovation. Coal-fired electrical generation plants will come under intense pressure to remove and sequester carbon emissions, or to purchase carbon-offset credits. This will increase the end-user’s cost of coal generated power while accelerating the development and implementation of energy conservation and renewable energy technologies.
What are the keys to a successful 2009? Whether you are an owner or user of commercial real estate, thriving in this next year will require cash, flexibility and patience. You will need access cash to weather the current economic turbulence and to exercise buying opportunities. Flexibility will be needed to address tenant rollover, and to adopt to more stringent building energy codes. Lastly, patience will be required to remember that as unprecedented as this economic crisis is, this too shall pass.
Article by: Mark Casey
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