Why 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 year’s $ 359 billion total as per Real capital Analytics, a New York based real estate research firm.

There was 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 retail outlets.

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 mortgages.

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 industry.

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.