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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2010

5 Factors for the Future

Know where to look when predicting the commercial real estate market in 2011 and beyond

5 Factors for the Future

The past few years have challenged  commercial lending professionals and the commercial real estate industry as a whole. Similar to the residential mortgage finance world, the high-flying and high-paying days of 2006 and 2007 now represent only distant memories.

As commercial mortgage brokers consider their marketing and business plans for 2011, a couple of questions stand out:

  • What does the future hold?
  • How can brokers best position themselves and their businesses to thrive moving forward?

To forecast where we are likely headed, we must know where we are today. Commercial property values are about 40 percent less than they were at their peak in late 2007, according to Moody’s/REAL Commercial Property Price Index. Total commercial and multifamily mortgage originations were down 46 percent in 2009 alone, according to the Mortgage Bankers Association.

Remembering these facts, let’s look at five of the major economic issues commercial mortgage brokers should concern themselves with in the next few years.

  1. Population growth: The U.S. is growing, but at a small annual rate. The U.S. Census Bureau estimates that the nation’s population will increase by slightly less than 1 percent per year for the next 15 years. Despite the low percentage, any population growth is good news. More people means increased housing needs. It also means increased demand for jobs and places to perform those jobs.
  2. Industry growth and decline: In large part, the U.S. has changed from a producing economy to a service- and consumer-driven economy. Generally, this isn’t a great trend for commercial real estate. Last year, the U.S. Bureau of Labor Statistics (BLS) released its projections for the top 10 growing industries and the top 10 declining industries for 2008 to 2018. Only three of the 10 expanding industries are beneficial to commercial real estate, with physicians’ offices leading the way. On the other side, seven of the declining fields long have had a key role in commercial properties — including the U.S. Postal Service and auto-parts manufacturing. These declines likely will add continuing downward pressure to commercial property values.
  3. Unemployment: The unemployment rate in the U.S. is hovering around 10 percent. When you consider short-term discouraged and other marginally attached workers, as well as those forced to work part-time because they can’t find full-time employment, however, the true unemployment number was 16.5 percent this past June, according to the BLS. Fewer workers require less office space, less warehouse space, etc. The Congressional Budget Office projects that unemployment will decline to 8.8 percent in 2011, but that it won’t hit the acceptable level of  5 percent until 2014. In other words, jobs are going to come back slowly.
  4. Public debt: Public debt in the U.S. — including national, state and municipal debt — is a large and encompassing problem without a readily apparent solution. It almost certainly will affect the commercial real estate market in the next few years. The country must start paying off its debt burden soon, and there are only a few ways to handle that — likely a combination of printing money, raising personal and corporate taxes, and cutting services. The problem is that the less money a corporation has to reinvest in its own business, the more its expansion and other growth initiatives are hindered.
  5. Real wage growth: This is a critical category that doesn’t receive enough attention. Real wage growth is adjusted for inflation. From 1979 to 2007, inflation-adjusted hourly wages have increased by only 0.1 percent annually, according to the Economic Policy Institute. In a consumer-driven economy, how can consumers continue to go to the malls and to auto dealerships and buy nonessential items when they don’t have the funds to do so? Spurring the economy with purchases must be prefaced by increasing wages. This is a large question mark heading into 2011 and beyond.

Although many factors must improve to recover from the economic downturn, there are bright spots and areas for growth in the commercial real estate market. Some prospects for brokers to pursue include:

  • U.S. Small Business Administration (SBA) loans or other business loans not collateralized by real estate: Commercial brokers should be up-to-speed with these programs and should work with an SBA lender that can help their clients, and in turn help brokers increase  their income.
  • U.S. Department of Housing and Urban Development (HUD) loan programs: Many people believe that HUD or some other federal agency must step up to the plate and get more involved in commercial financing via guarantees and securitization. The 35-year, fixed-rate apartment-building mortgage HUD offers is a way for property-owners to lock in a low interest rate and not have to worry about the costs of refinancing. HUD also insures various types of assisted-living, senior-housing, and health-care and hospital loans.

On the Web

  • For the U.S. Bureau of Labor Statistics’ (BLS’) list of the industries with the largest predicted wage and salary growth from 2008 through ’18, see sctsm.in/blst3.
  • For the BLS’ list of the industries with the largest predicted wage and salary declines from 2008 through ’18, see sctsm.in/blst4.
  • Other new commercial mortgage programs: There are always new and innovative financial mechanisms and loan structures being developed and offered. In a down climate, brokers must be the point-person for former and current clients. Brokers should know what’s new and what might be of some help to those in need.
  • Commercial loan modifications and workouts: There has been a lot of bad press about loan mods and workouts, but there is money to be made in salvaging distressed and delinquent commercial mortgages. This has become an increasingly large niche in the past 18 months.
  • Hard money: As bank lending has gotten tighter — and as borrowers still seek funds for commercial property acquisitions and development projects — hard money has been a more prudent alternative for many. A number of hard-money lenders use it as a tool alongside conventional loan-brokerage businesses.
  • Business incubators: This is a marketing niche you should focus on in these tough times. Many incubators are quasi-public operations that provide cheap and practical means of helping entrepreneurs get off the ground. Most are regional; some may be affiliated with national groups. In any case, these incubators could lead to the successful local businesses  of tomorrow.
  • Fledgling or brand-new industries: Despite widespread bad news, a new industry will likely emerge and grow strong in the next two to three years. What it might be is unknown to most, if not all, of us. As it grows, however, it will create jobs along with new facilities and work environments. Brokers who remain on the lookout and identify emerging industries in the early stages can reap  the rewards.

There are many things to be concerned about in commercial real estate. Many of the professionals who succeed during and after the current downturn, however, are the same people that succeeded in the last one — or at least the same type of people. They’re creative. They’re diligent. And they’re often a little more cautious and quite a bit more aware than those who fail.

By looking at where we’ve been, brokers can get a better sense of where we’re headed and better position themselves moving forward. 


 


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