Commercial real estate has been hammered in recent months, but billionaire real estate mogul Sam Zell says it could be a lot worse, and he doesn't think it will implode as did the residential market.
He says that commercial real estate is in measurably better condition than conventional wisdom has dictated. Commenting on remarks that CRE will be the next shoe to drop, Zell told CNBC, "Well it ain't dropped yet and I don't think its gonna."
I'm not as optimistic as Mr. Zell, but he is a long-time investment watcher worth listening to. I totally agree with his assessment of the following: Commercial, unlike residential, was not an oversupply situation. It was a climate where there was a sudden reduction in demand. Specifically, as the economy contracted, businesses scaled back either in part, or more dramatically. This created increased vacancies and soft demand in most sectors. Hampering recovery is the fact that banks are not doing much commercial lending, either out of irrational, outright fear, or their business model is focused elsewhere for the time being.
But as the economy improves, Zell contents, the fact that we are not adding new apartment complexes, we are not adding new retail centers, we are not adding new industrial facilities, etc. will lead to space shortfalls in the coming years once the economy comes roaring back.
It is a buyers' market right now in all sectors. As for growth, about the only area that is growing is medical/office development. Pretty much all else is stagnant as far as growth goes. I'm of the opinion things are going to get a bit worse in CRE before they get better. Zell says it will only get better.
Time will tell.