Will the Commercial Real Estate Market Suffer the same Fate as the Residential Market?

by Paul Wilson
(Orlando)

Residential market is down by nearly 20% to 30% and may be even more in some places. Is it safe to invest in commercial real estate or will it suffer the same fate as the residential real estate?

Answer

The commercial real estate market operates on a completely different dynamics than the residential real estate. It is much broader as there are different property types, whose valuations seldom move in unison. These include retail, hospitality, office, industrial and multifamily residential.

The values of each property type depends to a large extent, by supply and demand. Demand is a function of the underlying business climate whilst supply is measured by vacancy rates.

A recession definitely hurts demand and results in vacancies and in extreme cases bankruptcies.

In commercial real estate the leases are normally of longer duration and as long as the tenant does not declare bankruptcy you will get your rent. When buying a commercial property you must check out the finacial position of the tenant.

Because of the long leases commercial real estate market is very slow to react. In the current market commercial real estate has slowed down due to lack of finances as the banks have become very conservative and scrutinize not only the property, the quality of tenant but also your caliber as an investor.

We expect the commercial market to remain stable through this downturn and not experience the volatility, foreclosures and value deflation that we've seen on the residential side.