CFO.com weighs in on commercial real estate

The staff of The Economist have written an article that almost seems like a response to my post Is subprime affecting commercial real estate?.  Their analysis focuses heavily on the acquisition and disposal of commercial properties.  A couple of interesting points to take from the article:

  • 16 of 21 national property markets provided double-digit returns to investors in 2006.
  • Property transactions have slowed since spring of 2007, correlating with changes in credit availability.

The commercial property market is likely not in havoc, unlike the craziness of the residential market, but enthusiasm has definitely cooled.  Because the commercial market has generally been tempered by greater financial planning (i.e. higher minimum down payments and tenant creditworthiness), I don’t believe that there will be major foreclosures and REIT crashes.  However, like the article stated, I do agree that investors will be more sensitive to bidding wars and not display the irrational exuberance that we saw with deals like Blackstone’s acquisition of Equity Office Properties (EOP).

How will this impact tenants?  I anticipate the following:

  • Fewer buildings will be changing ownership multiple times in periods of less than one year.  This will reduce some of the chaos tenants in those buildings have experienced as they occupied space in buildings that changed management and services with each different owner.
  • Less money to put toward building acquisitions will temper the rampant price increases, reducing opportunities for governments to reassess buildings and raise property taxes.  As a result, tenants will be less likely to see exorbitant tax pass-through changes as often as they have in the last 18 months.
  • Investors may begin to get more realistic about the rents that markets can support, rather than raising rates simply to cover their ballooning acquisition costs.
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2 Responses

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