Commercial Real Estate 2010- Another Year of Uncertainty?
Feb 08, 2010
When 2008 ended we all
said thank goodness! We knew that 2009 would not be easy, but we never expected
that it would be worse than 2008. Entering 2010 there are signs that things will
be better, but is that based upon actual fact or just hope? To answer that
question you have to look at past cycles to better understand what 2010 could
Through the 1980’s
there was a lot of money available for commercial real estate construction. In
addition, the government provided tax incentives through accelerated
depreciation to start a construction boom. This was done to take us out of a
deep recession coming out of the late 1970’s. The era of “build it and they will
come” began. The San Francisco landscape, like most major US cities, changed
forever as new major high-rises were constructed.
This booming market
cycle ended as a result of several factors not unlike today. The initial tax
incentives were suddenly taken away without any grandfathering provision,
leaving new projects and recently built projects without the tax benefits used
to build them in the first place. Without these tax benefits buildings
immediately became liabilities rather than assets. When buildings started losing
value, lenders retrenched pulling back new financing and withholding necessary
tenant improvement and refinancing funds necessary to keep these buildings
afloat. The result was a total collapse of the commercial market by 1990.
Savings and loan
institutions, which were less regulated than banks, were the first to
collapse—followed by the banks. Unemployment began to grow and the economy
slipped into a major recession starting in 1991. Government intervention with
the creation of the RTC program delayed recovery initially, until new financing
opportunities began to emerge. It was not until 1998 that we saw real job growth
and the beginning of the next economic growth cycle.
If 2008 was the
beginning of the current commercial real estate bust and we look back at
history—unless there is a dramatic shift in unemployment and valid financing
opportunities presented to existing owners and future buyers—we are nowhere near
a recovery period; let alone the next boom in 2010. Rather 2010 should look more
like 1992 and 1993 where government finally creates programs that will
eventually work, but will take several years to develop before results can be
seen. Unfortunately, like the early 1990’s the current administration believes
in job growth through public works projects and expanding government employment.
This direction takes additional time to develop and see results; moreover, it
leads to increased federal deficits, putting more uncertainty in the
marketplace. Also, typical of the 90’s collapse, government feels the need to
introduce more regulation to try to prevent future collapses through abuses
during liquid market cycles. This too further delays recovery, as markets have
to figure out how to do business under new regulations.
Will 2010 be better
than 2009? only marginally in my opinion. The shock of the immense downturn that
we are experiencing is over. Businesses have scaled back as far as they will go
and the amount of businesses that actually will fail has probably
stabilized. However, businesses will still struggle with limited cash and
financing options and therefore, try to expand in any fashion that will have any
real impact in 2010.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 25 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.