Commercial Real Estate

2009-03-24T21:44:00Z

I have been asked to comment on the state of the industrial real estate market, particularly noting any trends from 2008 to date

A review of Southern Oregon Multiple Listing Service data indicates that there are presently 23 offerings between 10,000 square feet and 50,000 square feet. The average time on market for those products is 218 days. Since early 2008, one transaction transpired and it is believed to be an acquisition by a junior lien holder protecting their interest. Therefore, there is not much market activity to report.

What is being seen with leasing activity is an increase in vacancy, which should be placing downward pressure on market rates. However, most brokers and property owners continue to quote rates in keeping with historical market conditions. Many potential tenants are asking for rates at half of the offering price. Presumably, negotiations settle somewhere between the ask and offer or a twenty-five percent rental rate reduction. What that does to reduce the overall value of the asset is the same, if not more. A rate reduction has an immediate impact to value of the asset and with current finance and investment markets in turmoil, capitalization rates are increasing in response to real estate risk. Not all that long ago, capitalization rates on high quality long-term letter of credit tenant were as low as 6 ½ to 7 percent. Many of those same assets are now in the market at 8 ¼ to 8 ¾ percent. That equates to a 20% mark down based on the same income stream. Coupled with rate reductions to the income stream, actual values can easily be written down 30%.

I am currently engaged in lease re-negotiations with tenants for property owners. Being keenly aware of these adverse conditions, I have encouraged my clients to be proactive in keeping their projects filled and viable…even if the means reducing rates in the interim. As much as I would like market conditions to be different, that is how I see commercial real estate in southern Oregon over the past year. With that said, what it may mean is that there may be real estate investment opportunities showing positive cash flow positions.

Curt Johnson, SIOR