As published in Scotsman Guide's Commercial Edition, December 2007.
As 2007 gives way to 2008, we asked Victor Calanog and Sam Chandan -- the managing economists at commercial real estate research and investment-analysis firm Reis Inc. -- for their take on the market's present and future.
How do you respond when people ask you whether the commercial market will be impacted by the residential downturn?
Calanog (VC): A lot of people, especially lenders, were hoping that the commercial sector would be exempt from the market volatility. It's not. I don't think people are surprised when they find out rents appear to be slowing down nationally and occupancy gains are moderating. Property fundamentals will be less robust than what we've seen so far.
How does this downturn differ from previous ones?
Chandan (SC): Construction in the past few years has been relatively restrained. That will allow us to muddle through a broad economic slowdown with a fair degree of grace compared to previous cycles.
What are the property types to watch and why?
SC: We're concerned about the retail sector. Consumer-spending growth has been strong in the past few years, supported by the buildup of home equity and easy access to capital. Now, this wealth effect alone won't support continued growth. In a constrained credit environment, consumer spending will slow down.
VC: While it looks like 2007 will be a banner year for the office sector, rent growth is slowing.
SC: Also, across the board, apartment demand is firming.
What do you predict for the economy in the near term?
SC: Whether a contraction will occur will depend to a great degree on how consumers feel. Our issues aren't completely resolved by the federal-funds-rate cut.
VC: We're not saying the sky is falling, but there is less basis for optimism.
How can commercial brokers stay profitable in a tightening market?
SC: Through proactive management of risk and careful assessment of potential risks.
VC: The simplest thing is to look at the best-case scenario and the worst. For example, to what degree does income have to fall before borrowers default on their payments?
What is your forecast for commercial real estate?
SC: Restraint in construction activity and supply will allow the market to stabilize after a period of softness in demand that will drag into 2008. Investors who come into the market at this stage in the cycle will look at commercial real estate as a longer-term hold.
VC: Whether or not a recession occurs, a lot more people on the building side will want to wait and see before they commit to further projects.
Melinda Young is an associate editor at Scotsman Guide. Reach her at (800) 297-6061 or email@example.com.