Trends that will shape commercial real estate in the next century.
These observations come from Mark Tyburski, president of Integrated Loan Services' (ILS) Advisory Group and an executive vice president of ILS.
"With prices at or nearing 100 percent of replacement costs in all major markets and a strong economy, I expect a continuation of the trend of new supply of commercial real estate coming on-line," said this 20-year veteran of the commercial real estate appraisal business. "Properties that look to be The best investments are those that have the least risk of over-supply. They include (most appealing to least): office properties in central business districts; retail regional malls; retail neighborhood centers; R&D; industrial warehouses; suburban offices; apartments; and local retail centers. I expect those trends to continue."
He also predicts the following trends to influence the commercial real estate market for the next few years:
Look for a Landlord's Market: Generally, it will be difficult for tenants to negotiate really favorable rates for space, according to Tyburski. "The current strong demand for space will continue to exceed existing supply," he said. "In some cases, this situation has resulted in significant rent 'spikes' over the past couple of years." Because of the market's high level, Tyburski is advising tenants to avoid making long-term commitments in the current market for most properties, if possible.
Better Deals Coming in the Suburban Office Market: Tyburski expects there to be better deals a year from now in the suburban office market. "There have been more speculative buildings going up in the suburbs, so we anticipate this will create more competition within the next 12 months," he said. "Not so for the industrial and R&D buildings, which are driven by actual commitment and rarely done on speculation."
Don't Wait on Downtown: If you are currently in the market for office space in a central business district, make your deals now. "Whether you rent tomorrow or a year from tomorrow, expect the rates to stay about the same in most downtowns," observed Tyburski. "We don't anticipate a glut within the next 12 months, you're not likely to benefit by waiting for a better deal."
Great Time to Sell: On the other hand, now is a great time to sell or lease excess space, Tyburski said. "While we believe regular space planning is essential to operating efficiently, it is especially important this year due to the strong market that exists for excess space," he said.
A Return of Traditional Investors and Lenders: For next year, look for the return of traditional investors and financing sources, and with them more realistic prices for purchasing buildings. Even if the Wall Street funds come back to this arena, Tyburski expects they won't have the revolutionary effect on the market that they did during the past few years.
Over the past three years, REITs have had a significant impact as major buyers of commercial real estate. "Their appeal in the market place created a significant amount of capital for investment in commercial real estate," said Tyburski. "The problem was that there was more capital than commercial real estate investment opportunities. As a result, they got aggressive with purchase prices in order to make deals happen. This in turn forced traditional investors and lenders (pension funds, debt investors) out of the market. Of course, all that changed at the end of 1998, when REIT prices fell and dried up Wall Street capital. We all know how many of those deals - deals where there were solid commitments - fell apart. Suddenly, those buildings had to be offered to traditional investors who were not willing to pay those high prices. In the end, prices fell and building owners had to accept a least 10 percent less."
A Change in the Buyer/Broker Relationship: The commercial real estate broker has traditionally benefitted from the principle that "knowledge is power." Commercial real estate brokers for years have had a monopoly on information. Tyburski expects that to change and to take with it the buyer's traditional reliance on the broker for that information "With more information becoming accessible on-line to the owners and users of real estate, they will have increasingly stronger power to make more informed decisions," he said. He pointed out that, in the past, tenants who needed to buy or rent space would call on their relationships with commercial brokers. "That relationship was based upon the premise that the broker was working on their behalf, when in fact they had a contractual responsibility to operate in the landlord's best interest," said Tyburski. "In short, those looking for space had no one looking out for them. This whole 'buyer's broker' concept has flourished in the residential area, and we expect it to begin to provide an alternative in the commercial arena. Look for more and more independent outside professional service providers to come into existence - providers of representation for both the tenants and buyers. These new providers will also help in-house corporate real estate departments to become more efficient."
Not all those "advisors" will be human, according to Tyburski. He expects to see more on-line service providers like COMPS, which provides complete information on recent transactions of real estate nationwide to lenders, appraisers, corporate real estate executives and brokers. "Keep an eye out for providers like CoStar, which give corporate real estate professionals access to active listings nationwide," he said. "This growth in the independent service providers will be at the expense of traditional brokers, and change forever the current fee structure. We expect the smart brokers will be the ones who see this coming and negotiate better pricing on their services."
The ILS Advisory Group provides commercial real estate advisory services, including feasibility studies, market studies, highest and best use studies, marketability studies, business valuation, litigation services, corporate real estate planning, tax counseling and property appraisals. Integrated Loan Services is the Northeast region's leading provider of residential and commercial loan support services. The 50-year old company provides appraisals, collateral assessments, credit reports, title searches, flood determinations, loan processing and property inspections. Their offices are in Rocky Hill and Fairfield, CT; Quincy, MA; and White Plains, NY. Tyburski summarized the changes in the industry this way: "Regardless of the specifics, there is one prediction we feel perfectly safe making - the rest of this century will be a time like no other for those of us in commercial real estate."
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|Title Annotation:||First Quarter Review|
|Publication:||Real Estate Weekly|
|Date:||Apr 7, 1999|
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