Did You Think It Would Last Forever?
By LC on Nov 16, 2007 in Commercial Real Estate, Strip Malls
The implications are clear. Historically the commercial market valuations trail housing numbers, and we are now seeing the effects of the subprime debacle in the commercial sector. Our neighborhood retail sector is fully dependant on shopper numbers, which equates to nearby housing population. When our customers don’t feel as wealthy as they did even a year ago, their spending tightens and their shopping patterns become less frequent. The result can be a sales decline, and as sales volumes drive achievable rents, we are seeing retail rents drop in most markets.
Strip center volumes are often the least affected, as our most successful merchants are typically food and service, much of whom can be categorized as daily needs. Our local quick service and smaller sit down restaurants will see a dip in volume, but not to the degree that the discretionary retailers experience. Our dentists, nail shops, established beauty shops, and tax practitioners survive.
Our hit comes in available new tenants. Much of the start up capital in this decade has come from HELOCs, and the “E” factor has dried up for many. We will see continued vacancies until home values stabilize and available credit (equity) returns. We will have an SBA report soon, but their 7A programs are off as well. Landlords refusing to acknowledge market trends will suffer. Tenants are normally reasonable and will accept a rent deal for a short term with the agreement to review the market in two to three years for a fair market value adjustment.
Message to developers: STOP BUILDING. We are not drastically overbuilt in most markets but leasing activity has slowed nationwide. As such, new product will affect the supply more than in previous upcycle years as absorption declines, and existing product has more ability to take short term income hits than your shiny new buildings. Sit on the land and wait out the oversupply and waning demand for a year or two. Construction pricing will continue to drop; you may even pay for your carrying costs with cheaper hard costs in the near future.
