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When New England Based Investors See the Bottom

When the market changes, not everyone agrees with what's happening.  If change is inevitable and everybody resists it,  how do we know when the market will bottom?  In the last post, you read about what 1,157 New England based commercial real estate owners and investors thought of the market. Today, you'll read about where they think it's going. If values are tied to income, what's happening with your tenants? Owners and investors have a keen eye on the tenant market. They use it as a gauge to predict where the market may be headed, relying on a tenant's strength to weather changes in their business and to consistently pay their rent. When surveyed, most investors and owners felt that tenants were becoming riskier and that tenant expectations of them were changing. 78% of those polled said that tenant defaults are increasing and 75% agreed that tenants expect landlords to modify leases upon request.  While 41% of those investors and owners somewhat agreed that tenants expect lease modifications, they clearly feel that tenant expectations are changing and they're aware that modification requests may still be looming. Only 9% of investors and owners said they disagreed that tenants expected more landlord concessions, but 31% disagreed that tenants expected rents to decrease. Tenants have been telling us that they expect rents to decrease, but most have been signing renewals, so these new leases they're renewing may be meeting some resistance as investors and owners try to hold out for as much as possible while still being open to deteriorating lease fundamentals in the competitive market. When do you think lease rates will bottom? Several investors and owners answered "who knows?", which was quite surprising.  Most agreed that rates would not bottom this year, rather in 2010 and 2011.  There seemed, however, to be a narrow divide between whether rates would bottom in 2010 or 2011. 2011 took the prize for the bottom of the lease rate market. When do you think values will bottom?

Definitely, 2011.  2011 was the resounding year that investors and owners alike predict a bottom in values in the commercial real estate market.  If incomes are so closely tied to values, then it makes sense that 2010 and 2011 would represent the bottom of the lease rate market and that affected values would result in 2011.

Ultimately, we see the emergence a new market where the necessity vs choice sellers compete. Investors will begin to see the distinctions between these opportunities.  They'll react accordingly, looking first for those who have to sell (necessity) and often times ending up buying from those who (choice) want to sell--these deals are often stabilized, less risky, are well located, and are superior in construction. We also expect investors to price the projected dregs of 2010 and 2011 into their proformas and begin to aggressively pursue deals as cash dwindles, vacancies increase, rents decline, and debt matures.  If you're a seller thinking about holding out for more, be ready to hang on for a while. It's going to be an interesting ride. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.