Tuesday, November 15, 2011

The Commerical Real Estate Debacle

In many small towns across America, Commercial Real Estate has been severely overbuilt.  This does not bode well for older downtown locations.

In the small town where we live, there has been a commercial Real Estate boom over the last decade.  Strip malls have sprung up like spring daisies, and the retail "sector" of our small city has spread out over miles of access roads and connectors.  And most of these new strip malls are empty - or nearly so.

What is the deal with all this commercial Real Estate?  It is the same thing, on a commercial level, as what happened in the housing market.  People saw property values rise and thought, "Gee, I should build a strip mall too, I'll be a millionaire!"

And so they built.  And built. And built.

And now, most of these buildings are vacant.  "For Lease" is the most prominent business in Brunswick, Georgia.  And the historic downtown section has felt the squeeze as a result.  How can you rent a 50 to 100-year old building when new strip mall space is available, out near fast-food and car-dealer row?

And unlike the housing market, it is not clear that this retail space will ever amount to anything.  People will always need a place to live, and the population of the world keeps increasing.  Housing will eventually recover.

But retail?  So much of what we bought at "brick and mortar" stores in the past is now purchased online.  You can order a lot of things online for far less than you can at the local store.  Why go to Staples for toner cartridges, when they are so much cheaper at Amazon.  That was easy!

And then there are products which have morphed (or will morph) into entirely electronic content products.  Record stores and book stores are dropping like flies.  Movie rental houses are the next on the chopping block.  When you can download an album, a book, or a movie instantly, why get in your car and burn $10 in gas to go get one? 

Yea sure, a lot of old timers are still not with the program.  But that will change.  We ain't going back, that's for sure.

And office space has the same problem.  A lot of these storefronts are leased to law offices or real estate places or whatever.  And yet, more and more people are working from home these days.  And more and more people are finding professional services online.

The only places with any sort of future are "hands on" kind of businesses - medical centers, doctors offices, and the like.  But then again, how long before doctors go back to making house calls again?  Why not?  Beats keeping an office.

The problem, of course, with all of this retail space, and the sprawl it has created, is that it has permanently scarred the landscape of our cities.  Most cities now sprawl for square miles and are characterized by these four-lane divided highways with traffic lights - long traffic lights - every quarter mile.  You see the same businesses flash by, over and over again, like the scenery in the Flintstones.  Home Depot, Wal Mart, McDonald's, Dollar Store, Curves.  Repeat ad infinitum.

What is funny to me is that, despite this overbuilding of commercial real estate, rents have yet to come down significantly.  Many places remain "for lease" as if the owner of the building is blind to the fact that hundreds of similar spaces are available and also vacant.  It is only a matter of time before these properties go belly-up and are foreclosed upon.

In the late 1980's, this happened in many cities, and created a domino effect.   In Washington DC, a new office building would go belly up, and the new owners, paying pennies on the dollar for the place, would offer it for rent at bargain prices.  Tenants from adjacent buildings would then jump ship, leaving that building vacant, driving another landlord or builder bankrupt.  Like giant dominoes, each building would in turn, topple another, with devastating effect.

I think we will see a similar effect in Commercial Real Estate shortly, if it has not already started to occur.  And this could extend our recession for a few more years.  And unfortunately, since the market for Commercial Real Estate has shrunk, there may not be any recovery for the more marginal or less attractive or poorly located properties.