It’s a good thing that homes come with living rooms and offices come with reception areas. Because when it comes to residential and commercial real estate in the region, a lot of folks are doing a lot of sitting around and waiting.
The spring market has been a washout for residential real estate. Closed home sales have been down by double digits every month (although last year that’s exactly what we predicted would happen, right through at least the first half of 2011). Even more ominously, the commercial real estate sector isn’t showing any budding signs of life, either.
Salespeople – especially commission-based ones – are, by their nature and proclivity, optimists. Someone, they’ll remind you, will do great in any market. Sometimes it’s the sellers, sometimes it’s the buyers. So there’s always a sunny side to any grey market.
But it’s hard to see the peeks of hopeful light dawning over local commercial real estate. Throughout New England, where there is movement, it is often simply a shifting of position. That is, a local firm moves from here to there. But where “there” comes off the vacancy rolls, “here” goes on. It’s a zero-sum game.
Or worse. When companies shift from here to there, they’re not always taking more space, or even as much as they had. Other companies, meanwhile, are going away entirely. That’s why every major market in New England in 2010 experienced negative net absorption. And first quarter numbers aren’t painting an improving picture.
In Boston, New England’s commercial real estate Mecca, brokers keep trumpeting a commercial real estate revival. But while the central business district is sporting a reasonable 12.6 percent vacancy rate, it’s true measure is the nearly 19 percent “availability” rate, which includes all space available to lease, not just what’s currently vacant.
Commercial real estate finance has long been a bastion of Big Capital. Commercial mortgage-backed securities (CMBS) are a critical component to the kind of multi-million dollar deals involved in commercial mortgage finance. And in its 2011 first quarter report, brokerage CB Richard Ellis asserts that “many players who were hesitant to lend following the crisis in the financial world are starting to come back. In particular…the CMBS market has re-emerged as a major player in the market.”
There was $9 billion of CMBS funding in the U.S. during the first quarter of the year, compared to $12 billion in all of 2010. So that puts us on track to triple CMBS funding by the end of the year, to roughly $36 billion. That sounds terrific. But, according to the Commercial Mortgage Alert, the last time we saw a level like that for a year’s funding was 14 years ago, in 1997. Just four years ago, in 2007, there was more than $230 billion in CMBS funded in the U.S.
No, commercial real estate finance in New England has become a retail banker’s game, because it’s become such small potatoes. Leases are lacking, sales have slid away. And everyone’s scared. Even in the hot apartment market, although inventory is tight and rents are rising, there is virtually no new construction on major apartment complexes. Too much money needed, too big a risk.
Which gets us back to the waiting game, and to the residential market. Home buying won’t gain ground until buyers have secure jobs. But one look at the commercial real estate numbers, and it’s clear that companies are being cautious about growth. And until we have more people in more jobs, businesses won’t need to be leasing additional space.
Interestingly, one of the few bright areas is industrial space activity. Some manufacturing companies are using the economic downturn to their advantage, buying space for less than it’s cost them to rent. Fortunately, that’s the kind of deal that usually involves a local buyer, a local seller and a local bank. Maybe the long-beleaguered manufacturing sector has this problem figured out. You rebuild the economy one small step at a time, and you don’t worry about getting back to your glory days. You just worry about getting a little better tomorrow than you are today. You wait.
