Buyers and sellers of commercial real estate remain on the sidelines as the credit crunch stalls the market. And commercial real estate investments are on hold, despite an optimistic long-term investment outlook.
So says the national 2008 PricewaterhouseCoopers Korpacz Real Estate Investor Survey.
The current state of the commercial real estate market in South Florida, which has taken some of the hardest residential-side hits in the nation, was slow and steady in September, but has come to a near screeching halt in the past month.
In the wake of an ongoing credit crunch and a financial meltdown on Wall Street, the availability of debt has all but vanished. Fundamentals have weakened across the commercial sector. And the economy isn’t signaling a short-term rebound, according to the investor survey.
“Corporate America, law firms, financial service groups — everybody is on hold,” said Tom Capocefalo, managing director for Studley’s South Florida office. “Organizations are very cautious about making the next move. They want to gather information and weigh it. They are looking for market signals to dictate whether they should expand or just stay put. Tenants are buying time.”
Time might be the only thing commercial real estate investors and tenants are buying in South Florida. According to Edgar Jones, vice president and regional development officer for the Rockefeller Group Development Corporation’s Florida operation, it’s rare to see a deal get done in today’s market.
“Some financing deals have occurred — which shocked me — but some who try to seek financing are finding such difficult underwriting standards and terms that they are choosing not to go forward,” Jones said. “The attitude is ‘step back and wait until the dust settles.'”
The problem is that no one knows when that will happen.
A separate study from PricewaterhouseCoopers and the Urban Land Institute predicts the markets will hit bottom in 2009 and then flounder in 2010. That’s the general consensus in South Florida, but it comes with a grain of skepticism.
“We’re predicting the general market will bottom out in the third quarter of 2009,” said William Byrd, a managing director with Transwestern South Florida, a real estate services firm in Miami. “Then we expect there to be what we call a flat or adjunct period, which means we’ll go through a down cycle of 18 to 24 months before the market starts to pick up.”
Byrd expects Miami-Dade and Broward counties to perform far better than most major markets in the country, settling in with vacancy rates at about 8 percent through the downturn. Palm Beach remains the weakest area in the tri-county region, he said, because of the residential real estate slowdown that began there in 2006.
In Miami, Rockefeller’s Jones isn’t as certain about the future. He said the combination of financial circumstances the nation has worked its way into makes it impossible to make predictions. What he will say is this: If the country remains optimistic about the new presidency, it could cause a quicker recovery.
“Some of these critical decisions Barack Obama is making in the next few weeks about his staff and what types of support he gives to different programs to lift the economy is going to have a lot to do with the American people’s attitude and the world’s attitude,” Jones said. “Right now, the jury is out.”
The silver lining: Commercial real estate investors view industry fundamentals as stronger than in previous downturns, suggesting a quick recovery when the markets revive. South Florida must first hit bottom.
Jones said he looks at the current situation like an anthill that’s kicked into ruin by a passerby. Thousands of ants run around with what appears to be no pattern, no logic and no organization. But when you come back a day or two later, the anthill is rebuilt and everyone is working.
“Three, four or five months from now, I think we’ll look back at this like we looked at the oil prices a few months ago when they were at $147 a barrel,” Jones said. “Who would have predicted such a significant change? In today’s world, things happen faster than they used to.”
The bottom line is that while uncertainty has stalled investments and dramatically reduced sales and leasing activity, market fundamentals continue to be sound, said Tim Conlon, partner and U.S. real estate sector leader for PricewaterhouseCoopers.
“The investor pool is now composed largely of more established players who can weather the storm,” he said. “While the outlook remains choppy in the near term, commercial real estate remains a viable long-term investment.”