Commercial Real Estate is a Safe Investment Option Even Today
It has become
easy to point finders at and blame the current bust of housing mortgage
because of its woes. Weak economy, retrenchment of workers and outsourcing
are some of the factors involved. Manufacturing industry is badly hit
in areas like Michigan, Indiana, and Ohio where there have been record
delinquencies and foreclosures.
Clearly economy is not the only issue. Many of the mortgage problems are
in the subprime market where a huge risk was taken in merely signing the
loans first. These problems were predicted by many industry analysts years
ago. Has the commercial real estate taken a hit? What was the effect on
office buildings, retail centers, shopping malls?
Not affected not immune:
Surprisingly, housing slump is not at all affected. On the other hand
the sector is showing growth though cautiously. According to CNN and Associated
press, strong growth in the office and retail segments, commercial sales
peaked to $ 401 billion through Oct 18 beating last years $ 359
billion total as per Real capital Analytics, a New York based real estate
a spurt if 15.2 percent in August on construction of office buildings,
shopping centers and other private non residential buildings last month
according to the commerce department. Though this is good news to the
real estate investors who park funds in commercial property, there is
no risk guarantee s the economy slows down.
The economy will surely be affected with more and more people facing higher
mortgage payments and record number of foreclosures. Budgets will be tight
as well as wallets and less discretionary spending to support malls and
According to William Wheaton research director at the MIT center for real
estate as home prices continue to fall people feel poor and spend less.
There; is pressure on the profits that fuel corporate spending. He puts
50-50 odds on a mild recession in the US with in the next six months.
Credit risk contagion will result if the broader economy stumbles
and the commercial real estate would be vulnerable to the credit risk
contagion. The credit crunch in mortgages has already spread to other
markets including commercial markets. A few sellers now ask for more capital
up front for financing mortgage backed assets transaction.
The whole of US and world economy are interlinked. Outsourcing of jobs
means less need for office industrial space here. Rising costs inhibit
spending more money on non essentials. People spend more money to fill
gas tanks rather than on new clothes.
It is also sad to see people maxing out their credit cards to pay their
It has become impossible to stretch the family budget to cover all needs
and house payment. Instead of risking fore closure they simply charge
a house payment. In short there is no room in their credit cards for other
payments. On line shopping had added to the problem where people are able
to shop in the comfort and convenience of their own home.
Some business report, that brick- and-mortar stores actually lose money,
but are supported by on line shoppers. This is specifically true where
consumers need not get a hands-on feel for an item before purchasing it
like clothes and shoes. Office supplies and small kitchen appliances can
be purchased without a test drive first.
Why the difference?
How can the commercial real estate property sector be immune to the problems
while other real estate industries are not? Why is there such a difference?
How is this industry safe from the common problems affecting the residential
mortgage industry? Much of the problem with the mortgage industry is the
high risk sub prime loans. Risky borrowers, record number of defaults
and fore closures will bring home prices down and cripple the construction
According to CNN the commercial market is not dragged down by the confusion
and trouble of residential mortgage because the buyers and sellers are
more sophisticated, have more financial flexibility and resources to tide
over credit market chaos.
According to Bernard Baumohl, MD of the Economic Outlook group in Princeton
N.J. It is a different animal, than the non residential construction
business with the direct relationship between banks and business leaders,
not banks and home owners.
Commercial real estate investors are smarter than others in the industry.
One should be more experienced and patient in lending and investing. Many
borrowers and lenders jumped on the subprime band wagon seduced by the
desire to own home and become wealthy through mortgage lending. The subprime
market was perceived to be a huge untapped pool of potential income. These
borrowers were naïve in accepting purposely under inflated introductory
interest rates to quickly close the loan and get in to a home.
As they faced economic sufferings and adjusted rates they could not make
payments. But experienced investors in commercial real estate are exempt
from the same issues. They are wary of both the borrowers and lenders
because of their experience. They could protect themselves through their
patience and experience against the other common problems facing the real
estate market to day.
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