Fact or Fiction...It depends on who you ask as to the State of Market

Implications: Commercial Real Estate Brokers are not the ones to ask about the state of the market. For example, the "Commercial Alliance" which is a subset of the NAR (National Association Of Realtors) just last September had stated all commercial market fundamentals were pointing in a very positive direction. This pronouncement was just after the summer's credit crisis. I for one wrote their chief analyst and the response I got back just confirmed that you can NOT have faith in a profession that is 99% compensated by sales/leasing commissions. What was said in essence, was the market data in 10 of the 13 categories that all economists use pointed in the direction they stated. I reminded them of the fact that the sudden and rapid change in the commercial lending climate would not be reflected in data. They suggested this lending situation would be beneficial to certain investors...again the postive spin. They finally admitted they need to do something to fight negative press.

Analysis: Commercial real estate brokers and owners are the wrong people to ask about the market. I realize this is a general statement, however, the heads of the leading firms who are looked at as the point persons for information as to what is going on in the market are not be relied upon for real insight.

Although market data can at times be misleading such as what The NAR used in their September forecast, you need to be aware of trends.
Unlike the stock market commercial real estate does not reflect market changes instantly, rather it takes many months for economic impacts to be seen in commercial real estate. Most anyone in commercial real estate for any lenght of time knows this fact. Real estate data is lagging information. The reason is that deals being finished today were generally started months ago when the market had a much different dynamic.

The real test is to look at the market the beginning of 2008 and beyond.
By Jan 08 you will see the 4thQ market results which for sure will look weak at best.

What to be watchful of is if the market shows a negative net absorption rate, then you have a weakened market. Couple that with the vacancy rate which if you see it go up, again is not a healthy situation for the market.

You need to rely on your own research about the dynamics of your particular market. You can find stats usually in local newspapers or industry pubilcations. Watch the trends and then compare that to the hype being put out by sales organizations.

When the economy begins to soften, companies begin to cut back on their overhead. Their real estate is one area that they want to off load. They either do this by subleasing or not renewing their leases.
Sublease space puts downward pressure on landlord's rents be it in their own buildings or in their immediate market area.
If you look at 2000-2001 the largest landlord in the USA was corporate America due to all the sublease space available.

Based on the article, lenders and market players should be wary of an impending problem. When tenants put up their space for sublease, this means they will no longer be occupying the space, and will not be renewing their lease. Therefore if a building was bought as an investment using the loose underwriting standards of the last few years, and it was bought using very aggressive cash flow projections, and of course a low cap rate, what do you think will happen?

That is why the problem over the summer can not be ignored as a one time situation that has no lasting or negative market impacts, because one shoe has already fallen, and the other is just hanging waiting to fall.

One keen insight is to watch certain REITS and private commercial real estate companies as to what they are buying. You will see they are buying mortgage debt...what that says is these players are waiting and hoping with fair certainty for those properties to go into deflaut. Why...because they can foreclose and wind owning a property less than what was paid or another words get the property for a better price than a few short years ago which provides a better return at the end of the day.

This article has actually done a favor to all that really want to know what is going on in commercial real estate and what is about to happen.

Just look at the continuing problems in the credit markets...certain financial implications are still be felt and will have far reaching affects.
Even NYC's Mayor Bloomberg has begun the process of  revising his City's budget due to a diminshed financial picture...is everybody crying wolf other than the brokers?