The sales of commercial office buildings in Los Angeles County decreased in volume by 63% between 2006 and 2008. While sales volume in the residential housing market increased during 2008, the same cannot be said for commercial property. Commercial buyers and sellers are unable to reach a “meeting of minds” since they cannot agree on correct rental rates. Reasonable rental rates and the true value of commercial buildings are difficult to ascertain since tenants are not moving, lease extensions are at lower rates, and vacancies are rising.
first tuesday take: The static state of the commercial real estate market can be traced to the economic uncertainty of the nation. In these times when cash is king and the economic future is murky, investors are wary of spending. Due to the infrequency of transactions, few investors know how much a property is worth, and even fewer can agree to a price. Compounding the problem, most financial institutions have tightened their lending standards, squeezing off the flow of liquidity to a tepid drip.
The abnormal, speculative nature of ownership over the past decade, based on the intent to profit solely by flipping properties quickly, drove classic, long-term real estate investors from the market. Neither the speculative nor classic investor will return until real estate investment fundamentals again set the value of real estate as a collectible with an annual income flow.
The “greater fool” profit on a flip – without concern for the property, the tenant or an annual rate of return on the price paid for the property – has been flushed from the market and will not return until the next price increase. The fact that sellers and their prices are very “sticky” and foreclosures on these types of commercial properties have yet to begin in earnest will delay any price level adjustments on investment properties sufficient to attract stable investors – the classic, long-term type – for a few years beyond the bottoming of single family residential sales, probably well into 2013 or 2014.
Additionally, job losses decrease employers’ need for office space. This condition will continue throughout 2009 and 2010, and only after the unemployment rate in California hits bottom will employers once again look for more space to rent or buy.
Re: “Surge in sales bypasses commercial market” from the Los Angeles Times