What is in store for the real estate market over the next 18 months? What about interest rates, commercial leasing, mall re-positioning, rent control, homelessness, and the question of “what keeps you awake at night?” These issues were volleyed by a panel of esteemed commercial and residential real estate professionals yesterday at the monthly luncheon of The Risk Management Association – RMA* On the dais were Jeffrey Bloom, EVP and Director of CRE, Comerica Bank, Steven Card, Senior Managing Director, Savills, Jack W. Carroll, Sperry Equities, and Brett Whitehead, President and CFO, Brandywine Homes. I found their comments column worthy so here goes!
Trends. Tight supply of commercial and residential offerings – fueled by tough city entitlement processes – which limits new construction. Older commercial real estate suffers from a lack of amenities – open concept layouts for office buildings, fitness centers and a general shortage of the stuff new workers crave. Adjusting these aging facilities will take an enormous amount of capital to retrofit.
Interest rates. Clearly, both sects – commercial and residential have benefited by the recent rate drop. Approaching 6% were rates last winter. The plummet this summer has created a bit of a residential buying spree. Cheaper mortgage rates also bring into play deals which otherwise might have been overlooked because of pricing. How long will the beneficial rates hang around? Who knows. Ask Jeff Lazerson!
Commercial leasing. Steve Card from Savills lamented the lack of suitable alternatives for his office tenants. With so few seats available – a game of musical chairs ensues. You don’t want to be left standing when the music stops. We’re experiencing similar frustrations with manufacturing and distribution space. What’s left on the market is a bit motley. Steve opined – and I agree – it would take a super large downturn in our economy to get vacancy back into the normal realm – 15% for office and 6% for industrial.
Mall re-positioning. Brett Whitehead of Brandywine homes shared with the audience – Brookfield Homes has purchased 150 regional malls nationwide! Seen as an opportunity to capture the “experience” many young residents seek – these well located, but vastly under-performing assets will be re-tooled into the neighborhoods of the future with proximity to dining, shopping, entertainment, and employment.
Rent control. General consensus among the experts was rent control is here to stay but is generous – 5% plus inflation. However, purchasing decrepit complexes with under market rents, refurbishing and jacking up the rates will no longer be a strategy.
Homelessness. Seen as a political rather than a real estate issue – the panel politely jettisoned this hot potato. Stay tuned.
What keeps you up at night? Steve Card, Savills – finding the right deal for his tenants in a market with very little available. Brett Whitehead, Brandywine Homes – delivery time of new neighborhoods. Jack Carroll, Sperry Equities – increasing costs and timing loan maturation with lease expirations. Jeffrey Bloom, Comerica Bank – earthquakes! As these are impossible to predict and underwrite.
*A bit about RMA. The Risk Management Association (RMA) is a not-for-profit, member-driven professional association serving the financial services industry. For more information, please visit their website https://www.rmahq.org/
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104. His website is allencbuchanan.com
Allen has been a distinguished voice in the cre social media and technology community since he started his blog in 2010. Allen’s posts are published weekly in the Sunday Real Estate Section of the Orange County Register. Allen is the creator of the popular YouTube video series Tuesday Traffic Tips. Allen has been named to the prestigious Top Ten On-Line CRE Professionals List for the past 3 years.