Friday, March 28, 2008

Commercial Real Estate Remains Strong

Driven by fundamentals rather than emotion, the commercial real estate market hasn’t enjoyed the fantastic hyper-growth of the residential real estate in the past few years. Neither has it suffered though the hangover effects of the wild party it missed. It fared well, slow and steady, thanks to solid fundamentals and investor discipline.

Commercial real estate hasn’t had to deal with subprime mortgages, home loan, adjustable rate mortgages, and interest only mortgages. Also, the commercial market hasn’t had the concerns regarding unrestrained mortgage lending by mortgage lenders and mortgage brokers.

As a result, the commercial sector has been able escape the residual effects of the housing market excesses that led to the bubble burst in the housing boom. Quite the contrary, commercial real estate did well in 2007 and is quite upbeat about future prospects.

This momentum is sustainable; there haven’t been comparable foreclosures or mortgage defaults as in the housing market. Experts believe the reasons commercial real estate hasn’t seen the effect as the residential counterpart is because buyers and sellers are more sophisticated and they have the financial resources to weather any corrections in the market. Unlike the housing market, commercial real estate development has deep ingrained direct relationships with banks. However, that doesn’t mean that the commercial market can stay unaffected by the residential market.

While the fundamentals in the commercial market remain strong it is still unclear the extent of, if any, residential housing will have on it. If the broader market is able to sustain itself, experts don’t foresee an issue with commercial real estate. But a sharp economic correction could make the market vulnerable, a situation which it has been able to avoid thus far.

As it happened to the mortgage market, the recent credit crunch has spread to other markets, in some respects to the commercial real estate arena. Some sellers have now started requesting more upfront capital if mortgage-backed assets are financing a deal. In the meantime, the housing market attempts to get back on track, while the outlook for commercial real estate is mainly positive.

In Florida for 2008, the prospect of lower interest rates (read: cheap money), increased foreign investment as a result of the weaker dollar, stabilizing rents, and, best of all, lower property taxes should ensure higher values and smooth sailing for commercial property investors.

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