The TrendCzar is currently on vacation. We thought we would use this opportunity to revisit some previous posts. Comments?
Inflation Hedge (originally posted April 28, 2008)
My next door neighbor who develops houses in Vermont has three unsold and unrented, and lamented to me yesterday the vagaries of the housing market. "You always know where you stand with the stock market," he said. "With real estate it's so hard to tell, and all of a sudden it hits you."
At that point another neighbor drove up and got involved in the discussion: "Haven't seen inflation like this in quite a while," he said. "I bought a loaf of bread and a half gallon of grapefruit juice yesterday and I couldn't believe the cashier wanted $9.50 for just the two items."
"Yeah I got some plums and peaches the other day, and it cost $11," said my next door neighbor. "It's amazing."
I joked with the other guy that he had "just burned up a couple of dollars worth of gas," idling his car while talking to us. But maybe it was no joke--I paid my first $60 gallon fill up yesterday.
"Hey, you're right," he said, before taking off.
You know it's really getting out of control when Costco limits the number of bags of rice you can buy. And we think we have it rough when people in many parts of the world have suddenly been priced out of survival staples--rice and grains.
Which brings me back to real estate. The commercial markets haven't taken their big hit yet, but you know it's coming. We're taking it on the chin from factors now extending well beyond the credit crunch fall out. The economy's swoon now embodies a powerful one-two punch of recession and inflation, which could lay out a lot of businesses, hitting shopping centers and hotels first as consumers cut back and summer vacationers stay close to home. Expect the unemployment rate to take a sudden jump by the end of the quarter, which will just fan the fire.
It reminds of the early 80s when our biggest selling point for real estate was that it's a great inflation hedge. Well, it's time to dust off that old slogan again.
Three and a half months later and we're still waiting for that "big hit". I'm in a major metro market in So Cal talking to end users daily and outside of furniture related companies, and some other manufactures, I've not hear any business owner tell me they are experiencing a severe reduction in sales or business volume. They are reporting a slow down in business but it is not catastrophic. While no-one is saying they are doing better than ever business owners are reporting their businesses are experiencing an adjustment in business just like the economy.
Commercial real estate prices here have continued to hold up, rents continue to rise, and new product coming online has been reduced due to the capital markets mess. This makes for less transactional volume both sales and leasing (which sucks) but with a vacancy rate of 3.6% in Los Angeles county there are few options for tenants or buyers to turn. Other surrounding sub-markets are also experiencing similar low vacancy rates and rising lease rates. The only exception would be the Inland Empire market where the bulk of new development has been completed over the last several years, and is further away from the ports. Overall infill markets here have held up extremely well.
I don't see how this equates to a "big hit" for commercial real estate. It certainly has been a big hit for commercial real estate brokers, and other industry professionals who rely on transactions for their incomes, but less so for property values and our property owners.
As real estate professionals we make the market, and this carries with it a certain responsibility for the perceived condition of the market. My recommendation would be to hold the doom & gloom commentary until it is warranted.
My 2cents
Posted by: Chris T | August 05, 2008 at 08:57 PM
Three and a half months later and we're still waiting for that "big hit". I'm in a major metro market in So Cal talking to end users daily and outside of furniture related companies, and some other manufactures, I've not hear any business owner tell me they are experiencing a severe reduction in sales or business volume. They are reporting a slow down in business but it is not catastrophic. While no-one is saying they are doing better than ever business owners are reporting their businesses are experiencing an adjustment in business just like the economy.
Commercial real estate prices here have continued to hold up, rents continue to rise, and new product coming online has been reduced due to the capital markets mess. This makes for less transactional volume both sales and leasing (which sucks) but with a vacancy rate of 3.6% in Los Angeles county there are few options for tenants or buyers to turn. Other surrounding sub-markets are also experiencing similar low vacancy rates and rising lease rates. The only exception would be the Inland Empire market where the bulk of new development has been completed over the last several years, and is further away from the ports. Overall infill markets here have held up extremely well.
I don't see how this equates to a "big hit" for commercial real estate. It certainly has been a big hit for commercial real estate brokers, and other industry professionals who rely on transactions for their incomes, but less so for property values and our property owners.
As real estate professionals we make the market, and this carries with it a certain responsibility for the perceived condition of the market. My recommendation would be to hold the doom & gloom commentary until it is warranted.
My 2cents
Posted by: Chris T | August 05, 2008 at 09:00 PM
Rents are rising?? Where?
Posted by: ccventura | August 06, 2008 at 04:57 PM