The commercial real-estate market, like homeowners, have faced declining values, delinquencies, foreclosures and bankruptcies. This past quarter saw the national office vacancy rate (the percentage of space existing but not occupied) hit a new high of 17.5%, the worst since 1993. Rental income from tenants provides the economic basis for building valuation.
With so much space now available, even if businesses begin hiring, it might take years to absorb the excess office space now on the market. This becomes a major problem when you want to refinance building debt. And therein lies the problem: approximately $1.4 trillion in of debt is coming due within the next 4 years. If the property value has fallen below the amount of debt, you can't refinance; a lesson millions of homeowners already know.
So, how does the economy crawl its way back with commercial property not being a dead weight?
* We've begun to see some of the first signs of rent stabilization. The decline in rents slowed this quarter perhaps foreshadowing the bottom of rent decline.
* Second, the uptick in the national office vacancy rate was also smaller than anticipated.
* Coastal cities are beginning to see signs of competitive bidding on the most desired buildings while cities hard hit from overbuilding Phoenix, San Diego, Las Vegas continue to see rents slide.
* For new entrepreneurs and businesses, this may be the once-in-a-lifetime opportunity to secure a desirable office building with upgraded amenities, in a prime location at a discounted rate. Pick a building you would like to work in, walk in the front door and ask for the management company is the best way to begin.
The key to recovery will be when forward looking business people see the possibilities before them and are in a position to take advantage of them. This is how the Warren Buffett's of the world invest: buy when there's blood in the street.
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