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Eyeball 2009! This is our holiday gift to you: Two weeks of outlooks on local real estate conditions! A new vision every day of the week at noon through Jan. 6! Our first complete week concludes with …
Robert Brunswick is the founder, president and CEO of Buchanan Street Partners, a commercial real estate investment management firm. The company did $3.7 billion worth of business in 2007, including investments in properties from Washington, D.C., to Irvine. That occurred before global investment firm TCW Group Inc. acquired a majority interest in the Newport Beach company.
Eyeball: When will the real estate market hit bottom?
Robert: My comments are centered on the commercial real estate sector and not residential, but of course there is some correlation pursuant to the economy.
In regards to commercial real estate, it’s important to remember that real estate is always a laggard in recessionary times. The primary issues for commercial real estate are they’re getting hit by the double whammy. First, the capital market implosion, with real estate being a capital intensive business, will force deleveraging of the asset class with a correlated devaluing of the asset.
Much has been said about this devaluing with projected 15-30% declines in values targeted, with certain product types and certain geographical areas being hit much harder due to the nature of their secondary market standing, lack of job growth and higher unemployment rates.
The second issue is, of course, the prolonged recessionary impact on real estate and its impact on rental decline and occupancy levels throughout the retail, office, industrial and multi-family sectors. So if you’re asking when will the values be at their lowest point, I would look towards the end of 2009 to the middle of 2010 — although no one can predict the bottom and there will be buying done prior to these dates in anticipation of the excellent opportunity to buy commercial real estate well below future replacement cost.
Eyeball: What numbers are you watching and what things are you watching anecdotally to see which direction the market is going in?
Robert: We certainly pay attention to a number of metrics as we assess real estate investment opportunity. Primarily we have focused on unemployment trends, consumer debt levels against annual GDP (which are currently at their highest levels ever), venture capital flows (as this speaks to new business opportunities), loan defaults (which will absolutely climb from currently half of 1% to probably at least 5% in this commercial sector) and finally tenant default trends based on region and based on business sector.
Eyeball: What do you fear the most?
Robert: Of course, the lackluster economy and the expectation for a protracted recession are high on my fear factor list as it’s all about the tenants and their sustainability and growth that is the capital driver for cash-flow maintenance and value creation within commercial real estate.
[ More Eyeball '09 HERE | Eyeball '08 | '07 ]
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Having said that, I’m probably more optimistic about its recovery than I am about the capital markets’ return to some level of normalcy. We need to get the banks working to put back money into our system, albeit in a much more thoughtful diligent manner.
Eyeball: What gives you hope?
Robert: Finally… a chance to talk about some good news.
The first thing that gives me hope is that our business sector due to the capital market and recessionary issues will wean away many of the part-time or less sophisticated participants such that the true professionals can continue to run and grow this asset class to enable it to garner more and more capital flows.
Further, I am convinced that America’s entrepreneurial spirit will, as it has in the past, get us back on track from an economy standpoint, which will certainly bode well for the commercial real estate sector. I’ve been in the real estate business since 1981 and have never seen such an attractive investment thesis in the offing.
Eyeball: What surprise or surprises will we be looking at a year from now?
Robert: I believe that 2009 will undoubtedly set a mark in time as the year that established the new paradigm for commercial real estate investing and real estate services.
[ More Eyeball '09 HERE | Eyeball '08 | '07 ]
Specifically, I believe that real estate participants will become more consolidated as higher quality reporting, services and performance will be required by investors seeking to invest larger amounts of capital into our sector.
I believe the deleveraging of the asset class will be a more permanent ingredient of future real estate investing and prompt real estate to become more of a proxy to a fixed income asset while also providing an excellent inflationary hedge with the benefits of investment in a tangible hard asset.
And you’ll want to come back …
- NEXT UP: Economist Chris Thornberg
- THEN: Investor/lender Bruce Norris
- All of Eyeball 2009 to published date is HERE
hey blogger you need to put up the track records of the people
you interview- how do we know whether or not this
guy was calling a bottom at this time last year? hes a realtor–
a commercial realtor- but still a realtor– the commercial
market is WORSE than the residential— it was overbuilt–
way overbuilt this guy should know that
Track record? we are talking about a sales person so I assume you mean his sales performance which may be what his income is solely tied to. The difference between Residential and Commercial is a (typically) four year degree and a fundamental understanding of markets. Though I am surprised most salespeople can tie their shoes their (unofficial) Union (C/NAR) promises less in terms of accountability and cares only about collecting it’s dues.
Not sure what you overbuilt point in attacking this post is but mine in the words of Brain Tracy is “The assertions of salespeople should not be interpreted as fact”. Meaning good (possibly expert) opinion but nothing more than a guess. Still nice to hear others thought who are willing to share,
Thanks Lasner, and a Merry X-mas from Disco Claus.
Whats great about guys like this is that he’s probably already scraped of a mere 1% of the funds, or about 37 million bucks. So, unless he is a complete idiot, he will live happily ever after no matter what happens. A very enviable position to be in.
Jon,
Ask him about their loan to the Skyline project in Costa Mesa/Hutton Center. I’m curious how much they lost on that deal, when they were 3rd in line on the debt train. Oh… was I not supposed to bring that up?
Usually 10 to 15% of homebuyers are first time buyers which are mostly renters who get job promotions or wage increase or young couples or individuals who get new jobs and employment or people who immigrate to the area but with current economy and job market, there is no way that renters can get wage increase or young couples get high paying jobs to afford home purchasing. I don’t think people are moving to southern California from other states at this time due to lack of jobs and high cost of living. I think more people are moving out. The only chance for the first time homebuyers who have no rich parents is to win a lottery ticket.
The rest of homebuyers besides the first time homebuyers are those who already have homes but they want to move to better, larger homes for many reasons. They may get larger family, they may get tired of the neighborhood, they may get higher income or they want to be closer to work, other family member, children schools. The average years for homeowners to keep their homes has been 7 years but it has been shorter between 2003 and 2007 because the prices were increasing so high that motivated people to sell their existing homes and replace them with larger and better ones.
The last half of 2006 and first of half of 2007 were a crossroad for real estate market in Southern California. Homeowners who marketed their homes in the crossroad period and sold them found out that the prices were not going up any more. It was the time that most smart and knowledgeable homebuyers stopped buying because it was at the beginning of sub-prime collapse and the housing bubble burst. In few months. After 6 to 12 months, they noticed that that they could buy their own home for 30% less form what they sold it earlier or they could buy a home that were thinking to buy a year earlier for 30% less. Those left over homebuyers from 2oo6-2007 who sold their homes at the peak were the ones who bought lower price homes in 2008. Those homebuyers who were waiting for lower prices couldn’t wait longer when they saw 30-40% price decline in 2008 and bought them in row and that was the main reason the volume of sales in 2008 were higher than 2007. This is not going to be true in 2009 or after because there are no leftover homebuyers with cash from previous years waiting to buy. Existing homeowners are not in mood to sell their homes in 40% lower than 2 years and buy more expensive homes and pay more property tax on the top of that. With the current job market and the economic recession, there is no prospect for new homebuyers coming into the market. I think, this realtor is either fantasizing or just tries to mislead the public as usual.