The Housing Bust

The American Dream

Former HUD Secretary, Henry Cisneros, recently made an appearance on the tube where he proclaimed that the idea of home ownership is still part of the American Dream.  He further stated that it should be the goal of government to facilitate that goal.  He also maintained that it was beyond the scope of government to allow such nonsensical “creative financing” schemes such as those that got us into the current housing bust (i.e.: no document, no income, nothing down type of loan instruments).  As the housing bust continues, hopefully we have learned by our mistakes.

 House Flip?

There are still a number of “House Flip” shows on the tube.  Now is not the time to engage in such investments.  Unless you have deep pockets to avail a sale or extreme patience in renting out such a project, now is not the time.  Even though the National Association of Realtors has reported a 9.2 percent increase (from Sept. 2008 to Sept. 2009) in existing home sales, it may be too soon to dip your toe into the “house flip” investment waters.  There are a still huge number of housing units on the markets and banks have yet to release many more onto the market.

 Condos as Investments?

What about condo projects?  While the superb combination of demographics and economics may push many Americans into this type of dream residence, it is still too early to look at them as an investment.  Many condo projects still have large inventories and some developers have turned to auctioning off units to gain some sales velocity.

 Have We Bottomed Yet?

Are we near the bottom yet?  There are some who argue we have hit bottom or are near the bottom.  According to the Case-Shiller Housing Index, there has been a seven-month rise in median home prices.  However, we are still 10% below the 2006 median home price.  Additionally, median home prices are only at the 2003 price level.  The case against a bottom at this time is the incredibly high unemployment rate, limited income growth, and small business creation is almost non-existent.  These economic measures are indicative of the drop in mortgage applications to a nine-year low.

 The housing bust continues.  It’s too early to place your investment funds in a housing investment.

Condominiums Will Lead the Housing Recovery

I recently commented on a story in Crain’s Chicago Business about a new apartment development planned for the River West community in Chicago.  The development might later be converted to condominiums.  A number of people thought that such a project might be a gamble, I took a contrarian view in that it is my belief that it is the residential condominium market that will lead the residential market into recovery.

There are two market factors that lead me to believe that this will be the case.  First, demographics.  Currently, 43% of Americans are single.  Add to that, the increasing number of baby boomers nearing retirement age and you have a formula for smaller housing units a la condominiums and townhouses.

Second, economics pure and simple.  If there is one thing that this “Great Recession”  has taught us is the fact that we have to be more prudent in our housing selection.  Ownership of a single family home is the quintessential American Dream.  But that dream is tempered by the current economic conditions of slow income growth and almost non-existent job growth.  Also, tight credit markets are making it necessary for Americans to pursue a smaller American dream.

These two components alone will move many Americans to a more practical housing purchase.  Condominiums offer the best value and the best exit strategy when the owner has the money and decides to move to a single family residence.  It is for these reasons I firmly believe it will be the condominium market that will lead us to a housing recovery.

Retail Storm may not Clear until 2012

With the current economic morass showing little abatement, the retail market may not clear until well into 2012.  This will pose some serious decisions by those commercial real estate investors with skin in this asset class.

There are still a number of retailers still struggling mightily in the retail market place.  The recent announcement by Blockbuster to close nearly 1000 stores undoubtedly raised the hairs on the back of the neck of many landlords with this tenant in their strip centers.  Blockbuster is not alone, a number of retailers are still mulling over store closings.  The American consumer is completely tapped out, which does not bode well for the Christmas season.  Until there is sufficient income growth the consumer may not get back into the market for a while. Consumers are sticking to the basics:  food and supplies.

Job growth is another matter for retail real estate investors to examine.  There is little.  In the retail sector alone, the job boards are dotted with few jobs, most of which are the cell phone enterprises.  This is not good for retailers.

There are reports that building permits are up.  When you delve further into that economic indicator you find that most of them are for apartments and/or near military installations.  Hardly a  strong signal that the overall economy is improving.

Adding to all this is the deep rut the overall commercial real estate market is in, across all asset classes.  With more and more once solid developers involved in foreclosure actions, it is going to take a long time for retail centers and subsequent development to recover.

Shrewd investors may wish to examine their centers closely and see if it could be re-developed into a mixed use center providing housing on the property.  It will be a number of years before additional rooftops will be built to support any recent or new retail development.  Careful examination of  an investor’s property (particularly if there are high vacancies) could create an opportunity for a solid re-positioning of the property.

Demographics and slow economic growth will lead to a downsized American housing owner.  It will be the residential condominium market that will be the first to recover.  This may lead to development opportunities for retail shopping center owners attempting to re-position their centers.

Without population growth, employment growth and income growth the retail sector will not recover until mid 2012.

Accidental Entrepreneur Impacts Office Market

The economic downturn has turned the employment market upside down and has created a number of accidental entrepreneurs.  Consider the following:

• A Banker who had been in banking for 16 + years had been downsized.  Luckily he had a law degree.  He has set out to hang his own shingle looking to secure small office space.
• A chiropractic team decides to break up the practice and secure separate smaller office spaces.
• An empty nester who happens to be a manufacturers rep sells his single family home and purchases a condo.  It happens that the condo has little additional space to accomodate a home office. Consequently, the rep has to secure a small single person office.
• A technology rep is charged with the responsibility of seeking his own small office within his company’s budget.

All of these individuals sought smaller offices.  The impact is being felt all across the office market.  Such dramatic changes in employment or the move towards self-employment has changed office demand markedly.

Regus Group, a UK based provider of small, usually short term space recently opened a 25,000 square foot location in Chicago.  The location is set-up for smaller entrepreneurial firms and one person business entities.  The opening represented its 28th location in the Chicago Metropolitan area.  This is a strong indication that through down sizing, reduction in force, and outright business closures are leading to more and more business people striking out on their own.  It is a strong bet that Regus is banking on this.

What Impact will the rise in the self employed have on office market?  The direct beneficiary of this trend will be smaller office buildings close to many roof-tops.  Those that go out on their own typically like to have their office close to home.  Additionally, companies like Regus will benefit from the “free-agent” trend.

More Real Estate Trends

Slowly, very slowly we are moving through the economic morass. With continued determination we will eventually hit firmer ground.  When we do there are a few more Real Estate Trends that will prop-up.

1. We will see more housing near Sports and Entertainment venues. People will want to live and work near their favorite leisure activities.
2. Senior / Retirement housing will be developed near small college and university campi. This will be tranquil, idyllic settings for those whose thirst for knowledge can be satisfied. Look for newer housing of this type near public libraries and other centers of knowledge and higher learning.
3. Re-birth of the Regional Malls. Many indoor shopping malls have been dying a slow death because of increasing competition from “Lifestyle” centers and sad state of department store retailing. Those munincipalities with foresite and the ability to adjust their zoning laws will encourage ownerships of these malls to create a mixed use development that might create a hybrid indoor mall-outdoor lifestyle center to attract new retailers to these old almost obsolete centers. We will also see the indoor malls develop upward with housing, hotels, office and parking garages attached to the mall.

These trends will continue to reshape the American ccommunities we live in as we move forward towards a smaller, leaner commercial real estate landscape.

Real Estate Mega Trends

The $140 per barrel oil this past summer has put Americans on notice, (unlike the oil price shock experienced in the 1970’s), that there is a great deal of scarcity and that smaller commuter vehicles will be needed in our garages for the next upsurge in oil/gasoline prices. Additionally, the housing bubble has caused a major re-thinking about how we live, work , shop, and enjoy our leisure time.  The convergence of these two crises will lead  developers to create a new, dramatic commercial and residential real estate landscape.

Real Estate Mega Trends

• Mixed use developments will continue to be a growing development trend.  As such, you will see more “lifestyle centers” built with residential and office buildings as part of the overall development. “Lifestyle centers” are the large shopping centers that have replaced indoor malls as the place to shop. They will be more pedestrian friendly with solid paths built to both the residential and office components.
• Residential condos will be king!  As the baby boomers age and people re-think their dream homes, more and more will gravitate towards condo buildings (including town-homes, duplexes and row-houses). Gone are the huge houses situated in single family developments. People will purchase smaller, leaner domiciles as a result of the massive de-leveraging that is occurring.
• Exciting mixed-use developments will sprout-up along the development landscape. Senior housing will be incorporated into the commercial mixed-use developments. Leisure venues such a sports complexes, entertainment venues, and yes even industrial business parks will contain hotels, residential, retail and restaurant components.
• Urban-centric development will rise. Older small downtown areas will once again become in vogue. Particularly if they are near mass-transit. These will include senior housing, residential condominiums, community amenities (libraries, theatres and small convention/meeting halls), live/work buildings and office buildings. Parks and/or open space areas will the center piece or incorporated in these re-vitalized down town areas.

The driving force for all of this is the need for shorter commutes to work coupled with much smaller car ownership. Also, the desire to be near everything; shopping, entertainment and restaurants. Also, more and more people will seek pedestrian friendly living and working environments as they wish to pursue a healthier, less stressful lifestyle. These are the Real Estate Mega Trends we face as we move out of the current economic morass and into the next decade.

Office / Warehouse condos Perfect for Classic Automobile Storage

As the US Auto Industry struggles to survive, one has to admit they have produced some awesome vehicles over the years.  Interestingly enough a large number of automobile collectors look toward the purchase of Office / Warehouse condominiums to store their vintage or classic automobiles.

Some classic automobile collectors desire to create unique space to showcase their prized possessions. Instead of storing them in their garage with a bunch of other equipment or worse in a non-descript public storage facility, they actually go out and purchase a small office / warehouse condominium. In one such case a collector grew his small collection of a half-dozen cars and stored them wherever he could as he purchased and restored the cars.  He decided it was time to house all of them under one roof. The creation of a beautifully designed, nostalgic showroom by purchasing two adjacent condo units was the perfect solution.

The process was easy. The collector created an LLC for ownership purposes (from time to time he did source and restore classsic automobiles for re-sale at auto shows). A space plan was created. He then hired a general contractor to build-out his unit.

The magnificent unit included a nostalgic showroom office complete with old gas station and roadside signs. The warehouse floor had a glistening colored cement finish which really added to the appeal of the autos themselves. A mezzanine level was put in with a couple of rooms to entertain business associates, other auto collectors, family and friends. It turned out to be a terrific place to showcase his prized collection.

As one can imagine, Office / Warehouse condominiums are absolutely versatile in their usage, reasonable in their cost and perfect for business, entertainment or storage.

 

Mr. Mazikowski is a Commercial Consultant with Real Estate Consultants, Inc. (RECI).  The views expressed here are solely those of Mr. Mazikowski and do not necessarily represent those of RECI. One should not enter into any real estate transaction without first consulting their accountant and/or financial adviser. It is strongly recommended that one should consult their attorney before engaging in any real estate transaction.

Consider Office / Warehouse Condominiums for your Business

Even as the capital markets continue to receive their angioplasty, many small business owners are considering the purchase of an office / warehouse condominium to house a business entity.  Though with a great deal of uncertainty in the economy the vast majority of those owners with purchase plans in mind are holding back right now, electing to bridge a purchase with a lease to own strategy. They are prefering to sit on their cash for use as working capital while riding out the economic storm.

Of couse, this strategy can still work to the advantage of a small business owner in their wealth building plan.  Many developers of office / warehouse units are moving in the direction of a ”lease to own” program as unit sales slow down. Such programs offer the developer tremendous flexibility in providing an overall package to potential purchasers culminating in an eventual sale.

Prudent business owners with leases coming up for renewal and needing to expand or contract the size of their office/warehouse can enter into a lease/purchase transaction as a win-win situation. While the developer fills its project with strong occupants, the business owner can benefit in a few ways:

1)  It allows a business owner to efficiently design their business environment for later purchase.

2)  A business owner doesn’t have to commit a sizable sum of money in an immediate purchase, allowing them to use their cash for working capital.

3)  Weath building through real estate ownership can still be realized during or at the end of a lease term.

4)  Working with the developer, a business owner can lock-in a purchase price for their unit during a given time period in the lease. Depending on how the lease is structured, there can be many flexible ways in which to achieve an ultimate purchase.

Given these rough economic times, it is still possible to begin a path toward building wealth through real estate ownership. A small business owner should approach it in a creative way. Office / Warehouse condominiums are a great way to do so.

 

Mr. Mazikowski is a Commercial Consultant with Real Estate Consultants, Inc. (RECI). The opinions expressed here are his own and not necessarily those of RECI.

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