Market Recovery Update (Commercial)

Tom Donnell

If you're still not sure the market is recovering……

Unemployment has stopped declining overall
Florida, California, Arizona, Nevada and Michigan are all off the “declining market” list
Rents are stabilizing and owners are offering fewer move-in incentives
Commercial delinquencies are rising, expected to peak in 2010
In April there were a HUGE number of retail vacancies, but now many of those are being renovated, which means owners have leases filled and ready to move in
Cap rates peaked nearly everywhere and are expected to fall in 2010 and 2011. Class “A” cap rate peaked at 6.9-7.5% (so if you're still looking for 9-caps…)
Commercial market recovery expected in 2011, which means more distressed deals this year and declining next year
Multi-family vacancy rate expected to FALL from current 7.4% to 6.6% this year, then to 6.1% in 2011. (Remember that multi-family apartment recovery precedes office/retail recovery)
Fewer deals going into year 5 of the dip because, as the economy begins to recover, those sellers who hung in there will know that if they can just hang on a bit longer they won't have to sell distressed because there will be more investors next year competing for deals (supply and demand rule #1: when demand goes up, so does price)

HINT: performing income properties are NOT selling at discounts but DISTRESSED properties ARE. But if you're buying distressed, expect to have to fix the problems FIRST before you start getting cash flow.

If you're looking for distressed properties already throwing off a lot of cash flow, well, then they're not distressed! No one is going to sell a performing cash-flow asset at a distressed price because they don't need to. If you want to make a lot of money with distressed properties and have the confidence and skills to fix the problems then buy distressed. But if you need cash flow right out of the gate, then DON'T buy distressed. That's just how the business works 🙂