Making Money in a Wait-And-See Economy

by Chicago Agent

By Carrie Kreydick and John-Paul Wolfe

People often ask, “How is the commercial market doing?” We reply to this question with an emphatic, “OK.” There is a horizontal feeling to the current commercial real estate market – nothing to get excited about, but nothing to wring your hands about either. While some sectors and markets have experienced a rise in vacancy rates, others are continuing to be flat to positive in absorption and rental rates. Some tenants are still moving ahead with leases, while others have cancelled all expansion plans and have adopted a wait-and-see outlook on the market; however, there does seem to be some symmetry to it all. Although sales of commercial properties have fallen off dramatically in 2008 from 2007, many of the underlying fundamentals in the market remain strong and, of course, interest rates remain historically low.

The state of commercial real estate overall is difficult to comprehend, and there is definitely good reason for people to be extremely hesitant and even nervous when considering the next business or real estate decision. Illinois has officially joined the ranks of Michigan, Ohio and California as states with the largest job losses for the first quarter of 2008, and the Chicago metro area is ranked second in highest job loss out of 369 metropolitan areas across the country. This news comes after a positive 2007 where Metro Chicago added 28,800 jobs in multiple sectors.

Much like residential real estate, the deals that are getting done are with people that need to buy or sell based on some external overriding factor. In residential real estate, families still relocate, employees are still transferred and, unfortunately, economic hardships can force people to sell. Most businesses, owners and investors cannot simply put their future plans on hold because of an uncertain economy. Businesses need to expand, contract or relocate. Necessary changes need to be made to bring money in the door and remain profitable through this economic downturn and into the future.

The current economic uncertainty is most apparent in the retail sector. Consumer spending and confidence is low and many national retailers have slashed expansion plans, closed non-performing stores and even declared bankruptcy. There are fewer retailers in the market and more vacant space, but we don’t predict a dramatic burst similar to what happened in the housing market. Vacancy rates have inched up to 7.93 percent from 7.52 percent a year earlier, but average rental rates have nudged up to $23.44 per square foot from $22.93 over the same period. The speculation in the retail industry is that this downturn will be relatively short in nature, which points to a strong 2010.

In the meantime, we work with the tenants that are active in the market. Discount retailers will continue to grow. Service retailers, healthcare-related tenants, day cares, ethnically-oriented retailers, fitness centers and spas continue to open. Strictly retail tenants are also out there, but they are few and far between and are most likely regional or local in nature. People need to remember that real estate is local and specific. No piece of real estate is the same, and depending on the location, layout, visibility and rate, the traffic to the site can vary widely.

The market’s general wait-and-see approach is also visible in the Central Business District (CBD) of Chicago, as the office market has remained fairly flat over the first quarter of 2008, although posting a positive first quarter absorption of 70,000 square feet. Vacancy rates in the Metro Chicago office market also dropped to 12.7 percent from 13.8 percent a year ago. The positive downtown office market is a direct result of companies continuing to move back from the suburbs, which had a negative net absorption of almost 260,000 square feet in the first quarter 2008.

The industrial market had a strong first quarter of 2008, but the same attitude is beginning to emerge as result of decreased retail spending and a lack of consumer confidence. A slowdown in absorption and a slight rise in vacancies are expected as 2008 progresses. Additionally, rising fuel costs have put locations that are proximate to expressways, trains and transportation hubs in high demand and industrial rental rates continue to rise through the first quarter 2008. Overall, the Chicago industrial market had 4.6 million square feet absorbed in the first quarter, as compared to less than one million square feet in the first quarter of 2007. Chicago also led the nation in 2007 with over 37 million square feet of big box warehouse space being sold.

So what does all this mean? No one can argue that times aren’t tough. The outlook is uncertain and most tenants and buyers would opt for a wait-and-see decision-making process, if they could afford it. Luckily, real estate is specific to your clients and your transactions. Try to keep them moving forward and educate them about the market in order to alleviate the fear that has engulfed the industry. Educated decisions that are in the best interest of your clients’ long-term plans should be rewarding, regardless of the current economy. If you represent strong local or regional tenants, now is a great time to lock up space with landlords that once were only interested in national credit tenants. If you represent a qualified buyer, rates are at all time lows and deals are available. Uncertainty can make decision makers a lot of money, while the rest of the pack is waiting to see how the next two years pan out.



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