As published in Scotsman Guide's Commercial Edition, December 2008.
Having joined Grubb & Ellis Co. in the early 1990s, Robert Bach remembers the market turmoil at that time. "Back then, commercial real estate was the equivalent of [non]prime housing loans," he says. "Banks that invested in commercial real estate or made loans on it lost their shirts." We're in better shape today, says Bach, whose five-year forecast also takes an optimistic approach.
How would you sum up 2008, and what do you predict for 2009? This year was difficult for commercial real estate. That's going to continue into 2009, at least through the first half and probably through most of the year. What's happened in the past few years is that commercial real estate got caught up in the credit frenzy. We weren't the center of the problem, but we were caught up in it.
Historically, commercial real estate returns have been primarily income-based with a small appreciation kicker. That ratio got turned around in the past few years as our appreciation rates went up, as they were fueled by very cheap debt. What's happening now is that commercial real estate is going to return to what it has always been: The returns will be driven primarily by current income with maybe a small appreciation kicker.
Which sectors look strongest or weakest? The industrial and apartment markets are holding up the best so far. Shopping centers are pretty widely recognized to be the crosshairs of this consumer-led downturn. If you have a grocery-anchored strip center in a mature trade area, you'll probably do better than [if you have] an unanchored strip center on the urban fringe where housing development has stopped.
What success-factors should commercial mortgage brokers look for in regional markets? A mix of industry within the market, the diversity of the local economy and population growth. If areas are attracting population [growth], that creates demand that's filled by hiring activity.
Nationwide, what trends do you see for foreign investment? The U.S. is still considered the gold standard for commercial real estate investors. A market setback like we're having right now is going to put a pre-mium on safety, and I think global investors will probably stick pretty close with the primary markets and Class-A properties.
Considering today's tight credit markets, what's the advice for commercial mortgage brokers moving forward? To the extent that you can find solutions for owners who are looking to refinance, you'll make yourself indispensible. If you can make a living and hang in there through the fall and winter and first half of 2009, then you're probably in the right profession.
What do you think the market will look like in five years? I think things will be rosy again. Commercial real estate prospects look good as an asset class that will continue to attract a wide variety of capital from different sources and from different corners of the globe.
Darrick Meneken is an associate editor at Scotsman Guide. Reach him at (800) 297-6061 or email@example.com.