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What the Heck is Going on With This Real Estate Market?

By Jim Gillespie | January 29, 2008

Within a one-week period I had three of my veteran successful commercial real estate coaching clients tell me, “I wish this market would get worse so I can start closing more transactions.”

But not every commercial real estate market across the country is experiencing the same thing. Some brokers are still reporting solid demand for buying and leasing properties in their own areas. But most brokers I talk with tell me that things have slowed down in their own areas, and it’s just a matter of how much.

So why the discussion by these veteran brokers about wanting the market to get worse? Because in many areas the market has slowed down very gradually and the owners are still acting like it’s a seller’s market, when it’s not. They oftentimes still want prices they could have gotten 1-2 years ago, and they refuse to negotiate on their price. And at the same time buyers aren’t willing to pay the prices that these sellers want either. So what we then have in some markets is a state of indifference, where owners are deciding not to sell their properties unless they get a high price for them, and buyers are refusing to pay these prices. So in the end there’s a state of indifference in both buyers and sellers about consummating transactions, and indifference on both of these sides is a nightmare for commercial brokers. We get paid when people are motivated to close transactions, not when they’re indifferent about it, or not very interested in it.

At the same time I see some completely ridiculous articles being published telling us that the media is getting it wrong, that the market has now bottomed, and that good times and appreciation are already on their way to us. But the writers of these articles don’t give any analysis of the underlying fundamentals to support their conclusions–they give mostly hope supported by twisting what they’re observing in the marketplace to try and make us all feel good. One article that I read yesterday even made steam come out of my ears. The author not only said that the market had bottomed and that appreciation was on its way again, he said that the only interruption in the appreciation of property values throughout history in any area was caused when major employers suddenly left the area. I’d like to see him tell that to all the people nationwide who are seeing their property values depreciate without any major employers leaving their area. Property values have been going down here in my area of Southern California, and all of the major employers are still here in my area.

This last big runup in property values that lasted for years in many areas came primarily from easy financing being available to many people who shouldn’t have qualified for the financing. When you combine this with property values getting to levels that could no longer rise because of the income levels of everyone in the area, we had a total recipe for disaster. And once the easy financing disappeared, decimating great numbers of potential buyers, reality began to set in. Heck even at the top of the market in Malibu, California, a well known beachside suburb of Los Angeles, mobile homes on rented land in a mobile home park were selling for $1,100,000.00! That gives us an idea of how crazy things were getting in some areas, and what some of the lenders were willing to lend on.

But getting back to the three veteran brokers who want their markets to get worse, they want to see a solid pace of transactions going on again. And they recognize that this may only happen when owners know they’re not in control of the market anymore, and they get more motivated to sell and lease their properties. In the really hot markets buyers were buying properties at 4 and 5 percent cap rates, and they were seeing 20-30% annual appreciation with the properties, too. But now a 4 to 5 percent cap rate without any appreciation, or sometimes with depreciation now instead, just isn’t getting the buyers very excited. In addition, while home foreclosures are on the rise in many areas, owners of commercial properties typically have more staying power, meaning they’re not affected as easily when the market begins to turn, unlike many homeowners. So for commercial property owners to get motivated to lower their prices, they may need to begin feeling the pinch economically themselves. With this in mind more than once in my brokerage career have I seen an owner wait for two years to get $25,000.00 a month in rent for a building they could have rented for $23,000.00 two years earlier. And to be in a position to say goodbye to over $550,000.00 in rent while the building stays vacant for two years, you need to be doing much better than the rest of us.

If you’ve been reading my articles for sometime now you probably know that I do my best to shoot it straight with you. And fortunately at this time in my life there are very few rear ends that I have to kiss up to…which gives me more flexibility to shoot it straight with you…or at least to tell it to you the way that I really see it. But when I see some of these happy, pie-in-the-sky predictions being given to us by real estate journalists, though, it makes me laugh, and then it makes me sad. Because I know that keeping their job is sometimes dependent on telling people great news about real estate. Readers and advertisers with a vested interest in the market being good sometimes don’t want to hear the bad news…at least not repeatedly.

But first recognize that there are two different real estate markets you’re dealing with as a broker. One deals with whether property values are appreciating, depreciating, or staying the same. That’s the market that property owners and investors are concerned with, along with how well they’re doing with their returns on their properties. The second market deals with the volume of transactions closing in the marketplace, and that’s the one that really impacts your income in real estate brokerage. And when owners, buyers, and lessees are indifferent about closing transactions, or they don’t want to close transactions, this makes the market more difficult for you as a broker.

I wish I could tell you that the market has bottomed out in most locations, but I can’t. And when looking at the underlying fundamentals, I can’t see appreciation coming back until properties in many areas lose some more value. People and businesses can’t afford the higher prices now, and I don’t think we’re going to see those wild old days of easy financing returning anytime soon. They’ll be back again during the next real estate boom, but that’s not going to happen for awhile. The only possibility that I see for property values rising in the short term is if inflation gets a hold of us again and values begin rising as a result of the inflation. It’s been awhile since we’ve seen any serious inflation, but with the amount of money our government keeps pumping into the economy, a return of inflationary times could definitely happen. But that’s still not the same as experiencing real growth in wealth when property values appreciate while inflation remains low. In addition, many credible sources such as Goldman Sachs are predicting a recession here in the USA in 2008, and if this is true it certainly won’t help real estate values in bouncing back this year.

If you’re in a market where transactions are still proceeding at a solid pace, consider yourself fortunate. And if you’re not in one of those markets, you need to be doing more prospecting, marketing, and branding of yourself than you’ve ever done before. When you talk with top brokers who do a great job of marketing themselves, they’ll tell you that they spend more money on marketing in difficult times than they do in boom times. They recognize that they’re competing for a larger share of a smaller pie of transactions in their market, and they know that spending more money on marketing will get them to claim that larger share for themselves while other brokers are cutting back on their marketing.

And in closing, what may be most important for you in a transitioning market is keeping yourself in a state of mind of total and complete conviction in knowing that great opportunity is just around the corner, and that you’re right now in the process of discovering it.

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