Posted by: BayAreaComRE | April 21, 2010

The Bottom-Line to the Bottom of the Market

We were on a tour yesterday with a client looking to invest in a building in downtown San Francisco, but they questioned if now is the right time to invest or if it is prudent to wait for a year or two to capture the bottom of the market. It is a question posed often and one that we often ponder. How do you predict the bottom of the market? Short answer is you can’t, unless you guess. If someone answers matter-of-factly, they are fooling you and themselves. No one can answer this question because even when the bottom is occurring, no one really knows it. It’s only after the fact that people intelligently say, “the real estate market has bottomed, rates will not go lower, occupancy will climb.”

Put aside the question, “when will the market bottom?” Replace it with, “what would happen if you miss the bottom.” Who really gets the worst deal? On the flip side, who really gets the best deal?”  What do you gain from waiting? Lower Rent? Better space? More concessions? We are not saying these aren’t valid questions, most of our clients pose them. We feel the discourse should be shifted by the brokers, agents, and consultants. We are the people who track the market, immerse ourselves on a day-to-day basis, and if you study, negotiate and live in the real estate market, you should be able to admit when you ‘just don’t know.’

We don’t know when the market will bottom. We can say it will probably happen this year. We can say it is heavily dictated by unemployment. We can also say there is considerable consolidation still to come, probably some more foreclosures, definitely exorbitant debt maturing in the next three years. We track the trends at Cushman & Wakefield with a whole department dedicated to trying to predict what will happen, known as Research. We have posted a graph that shows the bottom of the market occurring seven quarters after the bottom of the stock market. But we can’t say for sure how this will all play out because this is very different than any recession before. If this latest recession mirrored its counterparts in the 70’s, 90’s or early 2000’s, more buildings would have already been unloaded, more landlords would have dissolved and relinquished their assets. See our story comparing past recessions to the current Great Recession, ” How does the current ‘Great Recession’ measure up to the early 90’s downturn and bust?

There are many different factors that this concept goes around, however. The Federal government has chosen to keep certain banks or institutions solvent and curb foreclosures by infusing cash or guaranteeing risky loans. What are the implications of this prolific spending? Sam Chandan, Global Chief Economist for Real Capital Analytics feels that if interest rates rise it will be in part because of inflationary pressures. Long term inflation increases will benefit commercial real estate, while inflation in the short run will hurt due to vacancy rates. See Joe Stampone’s full article. Sam Chandan on the State on the Commercial Real Estate Market.

The bottom-line in predicting the lowest trough of the market, from a Tenant’s perspective, is getting the lowest rate, best space and location with the most landlord concessions. While there will be some downward pressure on rental and occupancy rates, it won’t be terribly significant in San Francisco. That being said, it is relative to each market, even each sub-market. Most importantly, it is relative to each company or investor. Conversely, when the market was at it’s peak, Landlords reached the top of the market by achieving the highest rents, with the lowest cost capital on the line, and sold at the highest possible exit.

We have discussed this before, but it is very important. The minimal construction in San Francisco in the past two years has saved the real estate market from an even bigger demise (the last real estate bubble suffered from massive oversupply). Shadow spaces (not truly “vacant” but expected to be vacant sometime in the future) coming to the market mostly include subleases or fully leased government buildings. There could be as much as 1.8 million square feet coming to the market in San Francisco in 2010. Cushman & Wakefield represents some of the largest banks, law firms and professional firms in the world, and across the board we are seeing the consolidations occurring. We are bringing subleases to the market. Subleases do put immediate downward pressure on rents, but they have to be the right fit or the procuring subtenant will have to make capital improvements.

There is also considerable talk about “money” sitting on the sidelines, waiting to be utilized, but this “money”, especially private equity, has taken a considerable hit as well. “Private-equity investors took some huge losses on real-estate funds during the financial crisis. Morgan Stanley, for example, estimates its Real Estate Investment Fund VI International, which closed in 2007, has lost nearly two-thirds of its $8.8 billion investments. But is it time to step back in? Not if investors are expecting the 20%-plus returns they anticipated during the boom” See the full article, Private Equity’s Property Problems. It is a different reality with more conservative returns and realistic longevity.

Just today, the Wall Street Journal reported about the same issue in a story aptly named Underlying Concerns in CMBS, stating that “according to Fitch Ratings, more than 11% of some $536 billion of loans packaged into commercial-mortgage-backed securities are expected to be at least 60 days past due by year’s end.” Furthermore, $70 billion in loans have reached the desks of special servicers and $13.7 billion have been restructured.

It’s important to report on both sides of the story, the bottoming of the market and the drivers that will take us back to the top. We have reported on the many green shoots here in the Bay Area and nationally, including technology companies and slowing unemployment. We even created an indexed portfolio of prominent Bay Area companies which drive the market, and it has been up! See our story, Bay Area COM RE Index – Up 10.19%.

There are clearly many moving parts to this market. It would be a mistake to forego a real estate decision because there is the lowest deal still out there. As a Tenant or Buyer, if you find a space or a building that fits your company and aligns with your business model for the proposed term of the lease or price of the asset, be confident that the market will not get worse enough for you to have missed out. It’s not a question of when the bottom will hit, but rather what will happen if you miss the bottom. In the words of the great investor Warren Buffet, “The future is never clear, and you pay a very high price in the stock market [and in real estate] for a cheery consensus. Uncertainty is the friend of the buyer of long-term values.”

The answer lies in your business model. The bottom-line is do not wait for the bottom of the market to pass you by.



  1. Excellent summary and perspective. Well done and right on. No magic here, just go to work and work it out. Those left standing will take the spoils.

    • Wayne, Thanks for your comment. What do you specialize in? We would like to hear your perspective as well. We agree, there is no shame in taking a deal now if it makes sense. Thanks for following.

  2. Guys, great article and thanks for the link. I agree with a lot of your points, timing the bottom of the market isn’t that important, it all depends on your time horizon. I’d rather purchase before the bottom than wait and miss the bottom. There is little risk in slightly mistiming the bottom of a market.

    • Joe, you are right in that the risk is waiting, bet on the sure thing. No matter what happens, the deals out there in San Francisco are too good too pass up. What are the impressions in New York on the bottom of the market?

  3. thanks for information , keep writing thanks for sharing 🙂

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