Commercial Real Estate 2010- Another Year of Uncertainty?

Written by:	Hans Hansson
E-mail:	hans@starboardnet.com
Date:	02.08.10

When 2008 ended we all said thank goodness! We knew that 2009 would not be easy, but we never expected that it would be worse than 2008. Entering 2010 there are signs that things will be better, but is that based upon actual fact or just hope?  To answer that question you have to look at past cycles to better understand what 2010 could become.

Through the 1980’s there was a lot of money available for commercial real estate construction. In addition, the government provided tax incentives through accelerated depreciation to start a construction boom. This was done to take us out of a deep recession coming out of the late 1970’s. The era of “build it and they will come” began. The San Francisco landscape, like most major US cities, changed forever as new major high-rises were constructed.

This booming market cycle ended as a result of several factors not unlike today. The initial tax incentives were suddenly taken away without any grandfathering provision, leaving new projects and recently built projects without the tax benefits used to build them in the first place. Without these tax benefits buildings immediately became liabilities rather than assets. When buildings started losing value, lenders retrenched pulling back new financing and withholding necessary tenant improvement and refinancing funds necessary to keep these buildings afloat. The result was a total collapse of the commercial market by 1990.

Savings and loan institutions, which were less regulated than banks, were the first to collapse—followed by the banks. Unemployment began to grow and the economy slipped into a major recession starting in 1991. Government intervention with the creation of the RTC program delayed recovery initially, until new financing opportunities began to emerge. It was not until 1998 that we saw real job growth and the beginning of the next economic growth cycle.

If 2008 was the beginning of the current commercial real estate bust and we look back at history—unless there is a dramatic shift in unemployment and valid financing opportunities presented to existing owners and future buyers—we are nowhere near a recovery period; let alone the next boom in 2010. Rather 2010 should look more like 1992 and 1993 where government finally creates programs that will eventually work, but will take several years to develop before results can be seen. Unfortunately, like the early 1990’s the current administration believes in job growth through public works projects and expanding government employment. This direction takes additional time to develop and see results; moreover, it leads to increased federal deficits, putting more uncertainty in the marketplace. Also, typical of the 90’s collapse, government feels the need to introduce more regulation to try to prevent future collapses through abuses during liquid market cycles. This too further delays recovery, as markets have to figure out how to do business under new regulations.

Will 2010 be better than 2009? only marginally in my opinion. The shock of the immense downturn that we are experiencing is over. Businesses have scaled back as far as they will go and the amount of businesses that actually will fail has probably stabilized.  However, businesses will still struggle with limited cash and financing options and therefore, try to expand in any fashion that will have any real impact in 2010.