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Should There be a Letter -W- in Boston Commercial Real Estate?

Last week, I had breakfast with a gentleman with over 40 years of development and commercial real estate investment experience while attending the CCIM Annual Conference and Success Series in Honolulu, Hawaii.  (Hats off to my fiance for making the introduction. She sat next to this gentleman on her flight to Honolulu.)   Our conversation centered around his background as a hospitality operator and developer, his experience in non-profit financing resources, and his involvement in a global medical services and advisory firm. He asked what I thought the commercial real estate market.  I responded, "Well, I'm waiting for the other shoe to drop. People seem to think that we're emerging from the woods: unemployment's moderating, the Dow's hit 10,000, and many are feeling a more secure about their future."  I explained my concerns over what wasn't being discussed.  My acquaintance agreed. He said, "I've been through 3 of these cycles. We are in a W."

A "W" could be be summarized by the chart below:

We come off a market peak and investors withdraw from their investments as uncertainty about how bad the correction may become permeates the market.  The cycle bottoms out and begins a slow recovery as low prices stimulate demand.  Next, investors take baby steps into the market--mostly institutional and smart money.  The media broadcasts the pick up in investment activity and the public catches on--more investors rush in.  We're about to summit the center of the W. Today, we're topping off at the center of the W.  We're teetering and as "toxic" information comes to light--including 2010 changes in tax laws relating to long term capital gains, marginal tax rate increases, the future of interest rates, and perhaps most importantly, the $5 Trillion in liabilities or "toxic assets" that still exist--the market will contract again. For those in commercial real estate, this dip will come in the form of reduced transaction volumes and the retreat of investment capital. Banks will contract and become sellers.  Investor yield requirements will increase.  Once this second correction takes place, we'll begin to see the early signs of a true recovery that could last for years. What does this mean for you?  Be patient.  Focus on fundamentals in the market. If the deal sounds too good to be true, it probably is.  Beware, if you're jumping into the market for fear of missing out on the "run up", just keep in mind that it's not over, and there will be some profit taking in the center of the "W".  If you've been holding out for the market to improve and don't have years to wait, watch the market carefully over the next 3-9 months because there may be a brief window allowing for an exit before conditions briefly deteriorate again before begin the true recovery. Get free weekly email updates of this blog. 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 .