Posted by: BayAreaComRE | May 28, 2010

Memorial Day Brings Perspective to Our Passion

On the eve of Memorial Day Weekend, we at BayAreaComRE are humbled by the heroes who go to work every day risking their lives so we can live in the strongest and richest nation in the world. We are very grateful to be able to work and live in the United States, and do something we love day in and day out. We owe a great amount of that freedom to our soldiers. It’s weekends like this, that drives us to appreciate what we have and strive for excellence in our line of work.

From large, multi-market corporations to small start-ups and local businesses; from international asset managers to small family landlords, this Great Recession has broken our economic system and forced us to piece it back together. We are poised to make a big comeback, but we have to remain calm and focused, as there are still major hurdles and still more pain to experience. Our passion for the business does not drive us to be over-anxious or too optimistic. We are strategic and patient. Real estate, and more specifically commercial real estate, has been anything but calm, and every bit erratic and bipolar. As we break for the Memorial Day weekend, it is important to recognize the recent trends in the market both globally and locally so we can be smart in our decisions about real estate and capitalize on the opportunities.

Sometimes people question why we continue to do this business amongst such a profound downturn. Our answer is this; there has never been a better time to be in this business. Now is the time to gain the most important experience. We remain passionate about real estate because of the implications and potential of our decisions.  Real estate can make a company work better to reach their goals. Office space can brand a company’s message to the market while embodying a company’s internal dynamic. Office space evolves through the visions of executives and employees and realized through architects, contractors, consultants and brokers. Real estate professionals have a prolific influence on all sectors of business. On the global economic stage, real estate drives every part of the world economy and has major implications on the future success of that world economy.

From a macro perspective, whether it be times of socio-economic and political upheaval, or periods of growth and prosperity, most global trends tie back or tie into real estate. We are sure you have tracked the stock market dip below 10,000 points and read about the chaotic turmoil in Europe that is rippling throughout the world. There has been heavy scrutiny cast on the large financial institutions while community banks continue to fold.

The global economic downturn has precipitated in Europe, notably in the countries known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain), dipping to dangerous levels in GDP to debt ratios. The Euro has plummeted due to the economic and political turmoil, and in turn strengthened the dollar and commodities relative to the Euro. These global economic forces tie directly into commercial real estate. One factor, which we have seen in San Francisco Bay Area as well as throughout major metropolitan markets is that foreign investors have confirmed American assets to be highly secure and stable and thus increase the high demand for US buildings in top tier markets.

Robert Knackle articulates in The Implications of a Falling Euro, the concerns over the Euro caused investors to flee from blue chips to bonds and precious metals, further suppressing interest rates. Lower interest rates means lower mortgage rates, and delinquent loans are more easily restructured and serviced. High interest rates are the elephant in the room in commercial real estate. As the Euro worries investors, CRE benefits.

With all the concerns, uncertainty and green shoots sporadically and unconventionally appearing in the market, the commercial real estate industry has been trying to find its way, and we are in somewhat of a purgatory right now. Maybe we are still influenced by the final episode of LOST, but there are a lot of mixed messages in our business and it can be hard for companies to decipher it all.

The leasing market has been bipolar to say the least. In San Francisco, Salesforce renewed 220,000 sf at the Landmark at One Market and then BlackRock announced the disposition of 120,000 sf and Bank of America is set to dispose of nearly 60,000. More shadow space will be coming to the market, and more companies need to consolidate. Landlord’s are still dolling out big concessions in the form of Tenant Improvements and there is little evidence to support significant rent increases.

We also acknowledge that the mood is improving, start-ups are occupying space, and we have seen competition among tenants for the first time in a long time. There are great achievements in environmental standards and workplaces are transforming in more efficient, cost-effective ways. We have maintained a steady message that there are green shoots in the real estate business, but not enough to propel this market into growth and lower unemployment…yet. Absorption of new office space will be flat for some time, but we expect a strong growth period in two or three years.

Our business, much to our chagrin, can often be over-looked or under-valued. We maintain our passion because we have the opportunity to work with business influencers and decision makers who are also very passionate. Effectively managing a real estate assignment or portfolio is no small feat. We know we not only played a part in that company’s success and supported their business model, but we also played a role in the global economy. The profound events that have transpired in this last cycle could not be more prevalent to commercial real estate, and we see them on the ground every day here in San Francisco, throughout the Bay Area and Unite States. Our perspective to our passion has never been clearer, Happy Memorial Day Weekend to everyone!

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