The chain of pain in the economy is slowly putting more and more pressure on the enormous $3.4 trillion dollar commercial real estate loan tally. Put simply: people lose their jobs and businesses, they stop shopping at strip malls and renting shops and office space, vacancy rates explode, mall owners don't have sufficient income to service their debt, and loan defaults begin to hit the banks. Homeowners who cannot sell but must move are forced to rent their property, saturating the rental market and driving up vacancies there as well.
Statistically, the national vacancy rate for commercial space is now 16.5%, and rents have fallen accordingly. In key markets, the average rent is now 10% lower than a year ago. (Off 18.5% in key urban centers like NYC). Apartment vacancies have now reached a 23 year high according to Reuters.Tenants have a lot of space to choose from, and leasing companies that are not offering big incentives and lowering rents are seeing their business come to a standstill. Landlords have to get this through their heads, and fast.
Beyond this, prices have fallen for commercial property even as they have for housing. Many commercial centers are also "underwater," now worth less than the loans that are financing the building. This market dwarfs the "sub-prime" housing market that caused such turmoil and distress in the banking industry. The Fed now estimates that commercial loan losses could reach a staggering 45% next year.
All this said, I was walking over to the local Farmer's Market last evening, and was surprised to pass the bare wood framing and concrete slabs of a new building going up. The sign read: "New Retail and Office Space." What in the world was this developer thinking? The entire street, a main shopping and commerce district of my town, was already littered with vacant office and retail space!
It occurred to me that people just do what they do, habitually, and heedless of the realities that should now be glaringly apparent in this economy. We are in a long phase of contraction in commercial sectors all over the nation. It will get worse...before it gets worse. To survive in this market you have to abandon the old models of doing business. The old "Credit Check, First, Last and Deposit with a 1 year lease" is history for the foreseeable future. Landlords and leasing agents have to aggressively market their available properties at cut rate rents and offer strong incentives. Beyond this, they have to start thinking about the space more creatively. How can vacant commercial/office space be utilized in a different way? I explored that extensively in this article. Written in November of 2008, it shares the visions of several key social "prophets" and darkly predicted the path we are now on. The relevant passage concerning commercial real estate is repeated here:
"A possible solution will require realtors to begin innovating and evolving their business models to reflect changing economic circumstances. Those who hold fast to the old habit of credit check, first month’s rent, security deposit and a lease will see their property sit empty. And buyers will be few and far between. Even the few who do step forward to buy will have difficulty obtaining financing and more escrows will fail than those that close. But what if the space could be used to stimulate the new local economy that will inevitably grow to replace the old? Creative use of the space could turn it from an empty liability to a profit center for forward thinking brokers and agents in the badly depressed real estate market.
What if all the vacant commercial space in the business parks could be turned into co-ops open to anyone to come and utilize space and resources for business purposes? Each building could cater to a given area of the economy. There could be a computer co-op where people offering PC skills, graphic artists, web designers, writers, photographers congregate to offer their services in otherwise vacant office buildings. There are thousands with skills but without the money to open and finance a business along traditional lines. And there are thousands more who will be losing traditional jobs—people who have a wide range of skills. A commercial co-op creates a business community center focused on its defined skill set. People can come to the center to take advantage of the space for meetings, to use computers and other peripherals, to find other talented artists, image specialists or designers, locate a network guru. They could sell, trade or barter services, and the property owner just charges a set fee for daily or weekly access to the entire co-op.
Imagine a center like this focused exclusively on clothing, where women could come and make their own clothing, buy the necessary cloth, access sewing machines, or just sell or trade items from their own wardrobe. The way women love to dress, shop, and network with one another would see a place like this explode with activity in no time at all. Now expand the idea to include maintenance services in the blue collar sector where all the laid off construction guys can come and join mechanics, plumbers, electricians in a co-op. Imagine an electronics bazaar where people can bring their TVs, audio equipment, cameras, iPods, cell phones, computers, Playstations and then buy, sell or trade. Our households are overflowing with this stuff anyway, and because they won’t have money to buy new, people will adapt and “make do” with existing products. The idea of planned obsolescence, constant upgrading, and throwing the old away will give way to frugality, reusing the old, making do with what you have. Imagine a food co-op selling home made everything: pastries, pies, jams, home grown and home canned foods. Imagine a place like the existing antique stores one usually finds in the more distressed parts of most towns, co-ops where people can come to sell or barter anything.
How does the property owner make money? Instead of collecting rent from a single tenant, he uses the realtor and his agents and brokers as property managers for the co-ops. They collect revenues by just issuing access passes to anyone using the facilities, either day passes, or weekly or monthly passes--in amounts people can easily afford. The idea is to get the space thriving with activity, for it is this activity that will generate the revenue return for the agent and owner over time. Americans are already familiar with the shopping club concept. They have membership cards to large warehouse stores where they look to buy new goods cheap. The same idea can be applied to buying, selling or trading existing goods when people don’t have money to even to visit “Price Club” any longer. Think of it as a local eBay, right in your otherwise abandoned business park. The Property manager deducts their fee, and the rest goes to the property owner. The more active the co-op is, the greater the revenues, which could easily exceed amounts collected under a more traditional lease/rent agreement."
Innovate or stagnate. That is a key phrase to take away in this economy, which will continue to be depressed for the next 5 years, minimum, in my humble opinion.
- J. Schettler
Statistically, the national vacancy rate for commercial space is now 16.5%, and rents have fallen accordingly. In key markets, the average rent is now 10% lower than a year ago. (Off 18.5% in key urban centers like NYC). Apartment vacancies have now reached a 23 year high according to Reuters.Tenants have a lot of space to choose from, and leasing companies that are not offering big incentives and lowering rents are seeing their business come to a standstill. Landlords have to get this through their heads, and fast.
Beyond this, prices have fallen for commercial property even as they have for housing. Many commercial centers are also "underwater," now worth less than the loans that are financing the building. This market dwarfs the "sub-prime" housing market that caused such turmoil and distress in the banking industry. The Fed now estimates that commercial loan losses could reach a staggering 45% next year.
All this said, I was walking over to the local Farmer's Market last evening, and was surprised to pass the bare wood framing and concrete slabs of a new building going up. The sign read: "New Retail and Office Space." What in the world was this developer thinking? The entire street, a main shopping and commerce district of my town, was already littered with vacant office and retail space!
It occurred to me that people just do what they do, habitually, and heedless of the realities that should now be glaringly apparent in this economy. We are in a long phase of contraction in commercial sectors all over the nation. It will get worse...before it gets worse. To survive in this market you have to abandon the old models of doing business. The old "Credit Check, First, Last and Deposit with a 1 year lease" is history for the foreseeable future. Landlords and leasing agents have to aggressively market their available properties at cut rate rents and offer strong incentives. Beyond this, they have to start thinking about the space more creatively. How can vacant commercial/office space be utilized in a different way? I explored that extensively in this article. Written in November of 2008, it shares the visions of several key social "prophets" and darkly predicted the path we are now on. The relevant passage concerning commercial real estate is repeated here:
"A possible solution will require realtors to begin innovating and evolving their business models to reflect changing economic circumstances. Those who hold fast to the old habit of credit check, first month’s rent, security deposit and a lease will see their property sit empty. And buyers will be few and far between. Even the few who do step forward to buy will have difficulty obtaining financing and more escrows will fail than those that close. But what if the space could be used to stimulate the new local economy that will inevitably grow to replace the old? Creative use of the space could turn it from an empty liability to a profit center for forward thinking brokers and agents in the badly depressed real estate market.
What if all the vacant commercial space in the business parks could be turned into co-ops open to anyone to come and utilize space and resources for business purposes? Each building could cater to a given area of the economy. There could be a computer co-op where people offering PC skills, graphic artists, web designers, writers, photographers congregate to offer their services in otherwise vacant office buildings. There are thousands with skills but without the money to open and finance a business along traditional lines. And there are thousands more who will be losing traditional jobs—people who have a wide range of skills. A commercial co-op creates a business community center focused on its defined skill set. People can come to the center to take advantage of the space for meetings, to use computers and other peripherals, to find other talented artists, image specialists or designers, locate a network guru. They could sell, trade or barter services, and the property owner just charges a set fee for daily or weekly access to the entire co-op.
Imagine a center like this focused exclusively on clothing, where women could come and make their own clothing, buy the necessary cloth, access sewing machines, or just sell or trade items from their own wardrobe. The way women love to dress, shop, and network with one another would see a place like this explode with activity in no time at all. Now expand the idea to include maintenance services in the blue collar sector where all the laid off construction guys can come and join mechanics, plumbers, electricians in a co-op. Imagine an electronics bazaar where people can bring their TVs, audio equipment, cameras, iPods, cell phones, computers, Playstations and then buy, sell or trade. Our households are overflowing with this stuff anyway, and because they won’t have money to buy new, people will adapt and “make do” with existing products. The idea of planned obsolescence, constant upgrading, and throwing the old away will give way to frugality, reusing the old, making do with what you have. Imagine a food co-op selling home made everything: pastries, pies, jams, home grown and home canned foods. Imagine a place like the existing antique stores one usually finds in the more distressed parts of most towns, co-ops where people can come to sell or barter anything.
How does the property owner make money? Instead of collecting rent from a single tenant, he uses the realtor and his agents and brokers as property managers for the co-ops. They collect revenues by just issuing access passes to anyone using the facilities, either day passes, or weekly or monthly passes--in amounts people can easily afford. The idea is to get the space thriving with activity, for it is this activity that will generate the revenue return for the agent and owner over time. Americans are already familiar with the shopping club concept. They have membership cards to large warehouse stores where they look to buy new goods cheap. The same idea can be applied to buying, selling or trading existing goods when people don’t have money to even to visit “Price Club” any longer. Think of it as a local eBay, right in your otherwise abandoned business park. The Property manager deducts their fee, and the rest goes to the property owner. The more active the co-op is, the greater the revenues, which could easily exceed amounts collected under a more traditional lease/rent agreement."
Innovate or stagnate. That is a key phrase to take away in this economy, which will continue to be depressed for the next 5 years, minimum, in my humble opinion.
- J. Schettler
