Victor’s Insider Scoop on “Is The Real Estate Market Awful?” …
August 15th, 2011 | top of page
Is the real estate market awful? Your answer to this question should depend on you asking yourself a more nuanced question: “Which part(s) of the real estate market is/are awful?”
Cleaving the real estate market into its two simplest components—residential and commercial—yields a definitive answer.
Residential real estate peaked in mid–2006, plunged through early 2009 and has been seesawing from mid–2009 through 2011.
On the other hand, commercial real estate prices are now 46% above their mid– 2009 lows and are just 10% below their mid–2007 highs. REITs are currently a performance leading asset class.
So why has commercial real estate rebounded while residential real estate remains mired? One reason is that commercial property owners have had access to capital markets and have been able to refinance existing debt at record low interest rates.
Although fundamentals have improved over almost all commercial property types, apartment fundamentals are especially robust with vacancy rates dropping to 6.2% as home ownership declined. Imagine being a 20 to 30 year old in Generation Y (born after 1975±). Many in this age group have never seen house prices rise after they left the parental nest. These Gen Yers, having a general reluctance to consider a dwelling as a good buy, must necessarily look to rental housing. The competition for vacant apartment units has, in turn, allowed multi-family property owners to benefit from rising rents.
A second factor in commercial real estate’s recovery is the dearth of new development. Oversupply across all commercial property types should not be a problem for the next couple of years.
Residential real estate’s moribund state can be attributed to three main factors:
1. Continuing unsold new home inventories plus the large shadow market of foreclosed homes,
2. Difficulty in obtaining financing without excellent credit and a substantial down payment, and
3. Weak industry fundamentals, (relatively) high unemployment, and house prices that continue to diminish in many markets. These factors continue to bode well for the multi-family marketplace.
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