Murphy’s Law
Overall the commercial real estate industry is facing a barrage of problems, and Kevin Murphy, principal of The BridgeTown Group in Jacksonville, FL, listed all of them: lower dollar value, negative real interest rates, residential construction overhang, tight credit markets, higher transportation costs and resulting higher food and commodity prices, steady population growth, monetary and fiscal problems (if not mismanagement), a Presidential election and a burdensome national as well as personal debt level.

But Murphy adds: “Now you would think, after this litany of issues, I might be a little negative about things, but I actually am quite positive over the long-term. I think we are experiencing a periodic ‘cleaning-out.’ As long as the government doesn’t over-react, the economy will find its bottom and grow from there. In all this activity or ‘right-sizing,’ a lot of wealth will be created, which, at the end of the day, will more than offset the amount of wealth destruction we have seen to date.”

“For commercial real estate holders, the impact differs by property type where countervailing developments are either offsetting or exacerbating results,” Murphy said.

Here is Murphy’s take on how different property types are faring in current market conditions:

• Retail. Higher food and gas prices are stripping out a high degree of discretionary income impacting sales. Energy costs are driving more sales to the internet, which is lowering foot traffic. Storefront mortgage operations have disappeared and the result is higher retail vacancy. Coupled with higher operating costs, retail net operating incomes (NOI) are falling and with them values.
• Office. Generally slower economic growth is having it’ typical impact on office occupancy. Coupled with higher operating costs, office NOIs are stagnant at best. Credit market issues have made investment sales of offices difficult to secure even though the real interest rate remains negative.
• Multifamily. Continued Federal Housing Administration financing has buoyed up new construction in this asset subclass. Rising unemployment and deteriorating tenant credit along with increasing property operating costs have yet to seriously impact valuations.
• Industrial. The weak dollar is driving export growth and transportation costs are causing a rethinking of distribution networks keeping the industrial property market reasonably healthy. Less competition from residential land buyers has made land cheaper and a greater supply of construction trades has made not only industrial construction a bit cheaper but is impacting all new construction positively.
• Mixed-Use. One aspect of new urbanism - light rail, when coupled with the higher gas prices - is prompting more multi-use construction along the rail corridors.