Commercial Real Estate Blog

Wachovia issued a report earlier this month on the state of commercial real estate. Generally speaking, they are bearish on almost all asset classes. Citing a tight lending market, oil prices, slowing demand, and other factors, the anticipation is that the run up in asset prices will continue the reverse which was initiated over the past few quarters.

The report contains a lot of useful data and charts, and rather than paraphrase the details, I’ve outlined the key points below. If you’d like to read the whole report, it is available here for download.

• Traditional Commercial Mortgage Financiers Pick-up Market Share
• CMBS Issuance Halts and About Face
• Nonresidential Construction Set to Weaken
• Property Fundamentals Correction Underway
• Domestic Banks Tighten Lending Standards
• Slowing Economy Puts Pressure on Office Fundamentals
• Industrial Demand Cooling Off
• Apartments Expected to Benefit from Housing Slump?
• Retail Slowing with Consumer Spending

There isn’t much that wasn’t generally known in the report, but the numbers and charts quantify what is going on. The prices are national averages so cap rates, costs per square foot, etc. in the report vary significantly from what assets trade for in Silicon Valley and bay area. Nevertheless, money chases opportunity so any fundamental change in other markets will have an impact on our local market as opportunity costs become to great to ignore.

First time real estate investors are often torn between investing in commercial real estate, or residential/multi-family property. A while back we wrote a post about Rentometer, a quick and dirty rent analysis tool apartment investors could use to gauge market rents.

HotPads.com has gone one step further and introduced a Rent vs. Buy Heatmap showing areas which have a low (or high) ratio of Avg. Home Prices to Annual Rent. It is not exactly scientific, and the system is only as good as the data, but the heat maps provide some insight as to what areas might warrant further research.

The system shows North Sunnyvale/Alviso as having a low ratio of Prices:Rent, but it seems the system has been gamed by limited availability of rental units and for sale housing that is mostly mobile homes. That said, other areas hit hardest by foreclosures (Brentwood, Tracy, Hollister, etc.) seem to have decent amounts of data on both rentals and for sale making the heat maps more relevant.

They also have heat maps for median rent, foreclosures per household, and others.

While debt markets are facing some turbulence, the secondary market for Conforming Loans (those under $417,000 for single-family dwellings) is still healthy giving providing prospective homebuyers with readily available loans at attractive interest rates. For mortgages above this threshold however, lending rates are not only higher but borrowers also face more stringent requirements.

For many parts of the country, $417,000 is a relatively high threshold relative to residential real estate prices meaning most loans will qualify as a conforming loan. In Silicon Valley however, $417,000 does not go very far. In July, the median sales price for single-family homes in San Jose was $769,000 - a number which pushes most mortgages beyond the Conforming Loan limit into Jumbo Loan (those loans above $417,000) territory.

The higher rates and more stringent lending standards results in a decrease in the number of buyers for these more expensive homes. The result is an increase in demand for rental properties as fewer buyers are able to qualify for the loans they need to purchase making multi-family a segment commercial real estate investors should play close attention to.