Steve Kawulok, Fort Collins CO | If you go to a casino, you should know the odds of a bet before you place it. Not many people would be excited to discover that their odds of success were only one in six. You’d likely not place that bet unless you were desperate, or having too much fun to think clearly. Or, perhaps you would play, if you had some knowledge of how to increase your odds because you had studied the game closely.
As a seller of commercial real estate today, those are your odds in our region. Nationally the odds aren’t much different. According to a recent study we conducted, there are six sellers for every buyer in the market. Five out of six sellers will go wanting this year. It’s a simple calculation. We take the number of listed property offerings in the market, and divide it by the number of sales, and then adjust to annualized rates. Sellers, your odds of selling your property after a year of marketing are only one in six. Ouch! It can even get worse if you measure by asset type. For example, if you are a land seller, the odds shift to even more depressing numbers.
Coincidentally, these numbers relate to one’s odds of finding a job. The Labor Department recently released statistics showing that there are six job seekers for every job opening available across the country. When you see pictures of the lines waiting outside highly publicized employee hiring events, it seems like the odds are even more skewed against the job seeker. Certain job offerings likely have odds worse than one in six for the person seeking the position, just like certain commercial asset types have poorer odds of selling.
There is a relation between these two similarly matched odds of success. It turns out that commercial real estate often mirrors the fortunes of the job market in a region. It only makes sense that an increase in jobs precedes an increase in commercial space demand, and vice-versa. Recent statistics showing a diminishing job loss number give some hope that this parallel drain on commercial space needs will tailor off soon. However, vacancy rates have steadily climbed over the last two years.
While this bottoming of the unemployment rate may finally be some good news for our beleaguered commercial real estate market, it needs some perspective. Commercial real estate transactions fell almost 80% in 2008, and look to post similar anemic numbers in 2009. This is an industry that accounts for 13% of the national GDP, according to Real Estate Roundtable research. In the United States, that translates to 9 million jobs in “normalized” times (per research of the National Association of Industrial and Office Properties). Not many industries can withstand an 80% decrease in revenues.
The “new normal” vacancy factor for the office sector may well settle in to the mid or high-teens from now on. Until we experience robust job growth we may not see the ten- percent factor or less, that some regions enjoyed throughout the early 2000s. The only employers coming into our market recently have been mainly involved in “green” energy. These new employers have tended to gobble up industrial/flex property space rather than office space. Good news for industrial property owners, but not as helpful to office property owners.
When the odds are so dramatic, strategic positioning of your property is critical. A thorough analysis of the appropriate peer market of properties, based on the best research available, will help an owner make a smart decision with a commercial property. Good real estate professionals with appropriate resources will be invaluable in understanding the market and increasing the seller’s odds.
Job seekers are advised by most professionals to position strategically and differentiate their skill set. This requires them to thoroughly study the industry they are trying to find employment in. Job seeking and commercial real estate disposition seem to require parallel strategies. Success will come to those who are most aware of their market and how to best stand out in the crowd.
Commercial real estate will continue to be an important financial asset. The odds aren’t so good if you are a “blind” seller, but you can still play to win and maximize your odds!
Tags: Commercial Real Estate, commercial real estate market overview, commercial vacancy rates, employment and commercial real estate, seling commercial real estate, vacancy rates