The Housing Chronicles Blog: Real estate is local AND varies by sector

Thursday, January 3, 2008

Real estate is local AND varies by sector

One of the reasons I like to consult on residential projects is that they're often more interesting to analyze than strictly commercial or industrial developments. Whenever I walk into a new model home -- no matter if it's a one-bedroom condo or a huge luxury home --I pretend that I'm walking into the new home of a close friend for the first time. I notice things like room flow, architecture, design, elevations and community ambiance, and ask myself if I'd buy something similar depending on income, job location and family circumstance. In other words, no two residential developments are exactly alike, even if they're using the same floor plans by the same builder. When I'm thinking like a consultant, I'm also thinking like a potential buyer.

Non-residential developments, however, are based more on the numbers than psychology: factors such as demographics, rooftop counts (i.e., nearby households), vacancies and growth patterns along major corridors are the keys, and that's why the sectors of real estate perform differently.

Writing in the Wall Street Journal, writer Alex Frango asks 'How worse will it get?' for both the residential and commercial sectors:

The past year was the most painful in decades for residential real estate, as defaults on loans to less-creditworthy borrowers created a broader credit squeeze. House prices fell, home ownership dropped, foreclosures soared, and the housing market emerged as the soft underbelly of the economy.

Commercial real estate hit its peak early in 2007, when private-equity firm Blackstone Group LP paid $23 billion for office giant Equity Office Properties Trust, and then did an about-face. As credit tightened throughout the economy, commercial-property values tilted downward for the first time in several years.

Peering ahead:

Housing prices are likely to slide further this year, as credit remains tight and interest rates on many mortgages are set to rise, or "reset," and could trigger more defaults.

The commercial real-estate market, which includes properties such as offices, apartment buildings and shopping centers, could continue to soften as slower economic expansion causes rents to rise more slowly than in the past...

Relief from the housing woes is unlikely anytime soon. "It will be another very bleak year with the worst of it occurring in the first half," predicts Mark Zandi, chief economist at economic-research site Moody's "Inventory is only growing and needs to be worked off before the market finds some stability," he said...

Optimism about commercial real estate is tempered by the credit crunch and a slowly expanding economy.

"Rent increases will continue to slow over 2008, as we face weaker demand and slower growth in the broader economy and jobs," said Sam Chandan, chief economist at Reis Inc., a property-research firm based in New York...

Any downturn in commercial real estate will be different from the past, said Harvey Green, chief executive of Marcus & Millichap, because unlike the residential market, there has been relatively moderate production of new supply.

"We haven't been in a long cycle of rent growth to justify that much new construction," said Mr. Green.

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