Commercial Connection: Don't Confuse Market Timing with Holding Out for Bottom

Commercial Connection: Don't Confuse Market Timing with Holding Out for Bottom

In a real estate market likened to a vacillating dust storm, on what can we rely to guide our future commercial investment decisions?

The multitude of divergent opinions of the market's current condition, together with equally diverse future projections, are difficult to interpret and even harder to apply to investment strategies and goals.

It is my informed and practiced opinion that those economic market indicators that track shifts in fundamentals such as job growth and sustainability, consumer confidence, and the continual presence of rudimentary concepts of supply and demand, are among the chief vehicles to consider on the road to market recovery.

Every rise begins with descent. It's crucial to seek out opportunities in which to reach investment goals with confidence and long-term success. Toward this end, I believe it is vital to realize the significant distinction between "timing" the market and holding out for its respective "bottom."

As a commercial broker, I am often tasked with guiding clients to realize that purchase hesitation is not always warranted with respect to the market's inherent vacillation. In fact, I regularly caution against allowing the market's recent decline to be your primary reason for delaying commercial acquisition plans.

Segments improve

From a segmental standpoint, pockets of strength, stability and subsequent opportunity do exist. Internally, my office has seen an increase in both rents and absorption for Class A and top-tier Class B improved properties compared to the remainder of Class B and Class C counterparts.

I believe these increases can largely be attributed to a near-bottoming out of price levels among those at the top - a gainful advantage for those users with shallower pockets who seek prime space.

Our market may in fact have reached "bottom" at the opposite end of the segmental spectrum as well. The bottom tier of Class C assets may also have leveled and stabilized. With recent price adjustments in place, top tier Class A and bottom tier Class C assets may not move much further, yet room may still exist (as much as 10 to 20 percent) for downward price re-positioning among other segments.

With top tier price "ceilings" and bottom tier price "floors" securely in place, those assets in the middle will soon find their rightful and suitable place in the price platform and vacancy rates will top out.

The National Association of Realtors forecasts: "From the second quarter of this year to the second quarter of 2012, vacancy rates to decline 1.0 percentage point in the office sector, 0.9 point in industrial real estate, 0.5 point in the retail sector and 1.1 percentage points in the multifamily rental market."

To this leveling of key fundamentals, we add a projected supply growth lower than it has been in nearly a decade and attractive investment opportunities abound.

It's simple supply and demand, folks, and the concept hasn't changed

Moreover, locally, acquisition plans may be aided particularly in the summer months of our Southwest Florida market, when competition for properties is lessened resulting from decreased buyer traffic.

Employment rises

Projected to be among the strongest fundamental indicators, changes in employment show positive gains thus far year to date.

According to the Southwest Florida Regional Economic Indicator report prepared quarterly by FGCU's Lutgert College of Business, on a county level, Lee County's unemployment declined in March 2011 from 11.7 percent in February 2011 with an employment gain of 2,904. Collier County reported similar decreases from 10.7 percent in February to 10.2 percent in March with a net employment gain of 1,851.

In fact, on a metropolitan level, neighboring counties of Charlotte, Hendry and Glades also reported employment improvements in the way of decreasing unemployment for the reported time frame.

Decreases in unemployment, coupled with job creation stemming from positive changes to population and in-migration, assist in shifting the demographic balance and market dynamic toward recovery. Further, from a commercial space viewpoint, the impact of rising population and declines in unemployment are paramount.

Employment growth is a leading indicator of improved business health. As businesses improve and expand operations, they increase their need for additional and better-quality commercial space.

Declining supply of commercial space and market-corrective absences of new commercial space additions equal lower vacancy rates and increased absorption of commercial space in 2012.

Spending increases

Countywide taxable sales are a useful measure of increased consumer spending, respective confidence, and business conditions. Together with positive movement from the employment sector, statistically meaningful gains can be derived and applied as a demand factor to our commercial real estate market and used as a projection of consumer optimism going forward.

Locally, Lee County's taxable sales reported an increase of 5 percent in January 2011 (the latest data collection date from the Florida Department of Revenue). Similarly, Collier County reported an increase in taxable sales of 6 percent in January 2011. Such gains are drastic year-over-year improvements from January.

Many commercial real- estate investors are still on the sidelines with respect to property acquisition, waiting for universal recognition that the "bottom" of the market is upon us.

The "wait-and-see" mentality and the ideals behind this mentality can be tough to abandon in favor of stepping up commercial property acquisition plans when market conditions are uncertain.

Yet, one thing is certain. Commercial market indicators show favorable near-term gains. Particular segments of the commercial market are already showing increases in key market fundamentals while others are undoubtedly poised for rebound.