Business Perspectives

December 8, 2011

Uncertainty spreads to commercial real estate market

I promise this article will cover commercial real estate, but first I’d like to call your attention to an explosion of confidence that occurred recently. At least, that’s what I think it was.

I promise this article will cover commercial real estate, but first I’d like to call your attention to an explosion of confidence that occurred recently. At least, that’s what I think it was.

For most of this year, it’s been observed that consumer spending has been way down since the recession. While there are many reasons for consumers’ reluctance to spend money, it all boils down to a lack of confidence.

Even though the economy has plodded along this year, we witnessed something phenomenal over the four-day Thanksgiving Day weekend. Americans spent $52.4 billion, the highest total ever recorded during the traditional start to the holiday shopping season.

What accounted for this apparent burst of confidence? Was it just pent-up demand?

I haven’t heard a clear explanation for the frenzied sales, but consumers’ optimism might not last long. One consumer research group pointed out that consumer confidence is still far below what is typically experienced during a healthy economy.

What about confidence within the commercial real estate industry? Throughout the year, I’ve conducted my own little personal surveys of local commercial real estate brokerages and asked brokers and agents from other firms how their business was doing. In turn, I’ve been asked the same question by other brokers and by people who are not in our industry.

A common refrain goes something like this: “I’ve been as busy as I’ve ever been, but I have less to show for it than in the past few years. Many businesses are reluctant to make a decision or a commitment.”

The next part of their explanation is that there appears to be some indecisiveness stemming from a lack of certainty as to what will be coming out of Washington over the next year or more.

While there are always pockets of prosperity and some real estate firms seem to be coping better than others, it’s no secret that commercial real estate sales are down nationwide and in Wichita, and that leasing transactions aren’t what they used to be.

From a personal perspective, in the past 15 months, at least half a dozen businesses – in office and retail properties where our firm handles the leasing – decided to limit their lease extensions to six to 12 months, rather than their usual three- to five-year renewals. The reasons they gave included uncertainty whether the government would increase taxes, high unemployment, concerns over the poor economy, what impact the new health care laws would have on their business and whether demand for their products or services would increase.

A couple of these tenants, larger corporations who do business nationally and internationally, said that their business is good, but they didn’t want to commit to a term longer than a year because they want to see what the outcome of the next election will be. So they are accumulating cash, as are many big corporations, because they think they might need a big piggy bank if the election outcomes cost them money.

A recent article in The Eagle reported that the nation’s larger corporations have been setting profit records every quarter for the past four quarters. Corporate profits are now at their largest percentage of national income ever.

So when are they going to start spending all of that money? Some experts attribute the large profits to cost-cutting strategies, including downsizing and trimming personnel. Could it be that they lack confidence in our economy’s near future? Have they been paralyzed by the uncertainty that seems to be permeating much of the business world?

It has been speculated that there are many commercial real estate transactions and potential real estate developments clogged in the pipeline; that the cash supply exists to move forward when real estate investors and developers become confident that the timing is right. Many have indicated that the timing will be right when they are certain that out-of-control government spending is stopped, when the federal government stops borrowing massive amounts of money, when they can be certain that their taxes won’t be raised, and when the creation and imposition of new regulations by governmental agencies ceases.

Another influential factor would be a dramatic improvement in the unemployment rate, which would mean businesses have started hiring again in a dramatic way. Newly created jobs will generate business expansion, which historically leads to more commercial real estate transactions, including sales, leasing, exchanges and development.

Most of us in the industry remain confident that this will happen eventually. The key question is, how long will this take?

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