"Life shrinks and expands according to one’s courage."
This quote is attributed to the famous poet Anais Nin who probably was referring to self-actualization as opposed to accruing a fortune, but it’s akin to a universal principle in life – “The greater the risk, the greater the profit.”
There lurks a prevailing attitude in the marketplace that the “other shoe” is about to drop in commercial real estate, that the commercial real estate market is about to collapse under the stress of the commercial loans coming due. There’s an anticipation that property values will continue to decline as business interests consolidate and fuel vacancies.
It’s important to take a step back from the “Chicken Little mentality” and apply some critical thinking. Generally, the press is referring to a downturn in institutional level real estate, and private capital properties have most probably absorbed the brunt of this downturn.
Additionally, what aspect of commercial real estate are “they” referring to? Commercial real estate is a broad umbrella term for a host of real estate investment products, almost anything that isn’t a single-family home.
Commercial real estate includes apartment buildings, office and medical buildings, land (all kinds of commercial development opportunities), agricultural land, mobile home parks, retail centers, warehouses, industrial buildings, self storage facilities and NNN-leased investments, just to highlight the most common product types. There are investors out there searching for apartment buildings and mobile home parks in strategic areas because these investments have taken advantage of the housing need fed by the rash of single-family foreclosures.
You can see where I am going with this. It is simply inaccurate and short-sided to group all these different investment categories into one lump sum and make a broad assumption about the potential of commercial investment opportunities. It may be time to recognize that new opportunities are morphing in this evolving existing economic landscape.
Many prudent investors are stuck on the sidelines making 1 percent returns on their equity, waiting to react to financial indicators that signal a time to jump in again when the time is right. The cliche of "the glass half full or half empty” is cliche for a reason.
There are some indicators out there that are telling us the proverbial “shoe” may have already dropped.
Orders to U.S. factories rose 1.3 percent in March, according to the Commerce Department. A decline had been expected, and this widespread activity offset a steep drop in commercial aircraft. Previously occupied home sales rose 21 percent from a year earlier, and MasterCard Inc. said its first quarter profits in 2010 jumped 24 percent. Banks appear to be delaying foreclosures and starting more concentrated efforts to create work-out programs for clients both residential and commercial.
The cultural phenom of “buy and flip” continues strong as small and large investors gobble up the home residue of the sub-prime loan antics, which is continuing to drive up the median price of homes in many areas.
Yet investors continue to hold their cash in lackluster vehicles that are barely returning 1 percent to 1.5 percent at the expense of missing out on outstanding income properties.