MovinUptown.com- Uptown Charlotte Condos, Townhomes, and New Developments

Main Menu

Home

New Developments

Resources

The Next Correction

March Madness is here again. This year it's not just basketball that's got people refreshing their web browsers to see the latest news. Now everyone is watching the economy like basketball fanatics watch their brackets. For stock investors (more like gamblers lately), it's more exciting watching the quotes than watching the Final Four. What we are seeing in the economy is essentially a correction. Every period of growth in the economy throughout the 20^th century has been followed by some degree of correction. Last week a commentary was released by Wachovia's Senior Economist Mark Vitner predicting the next big correction in the US Market to be in commercial real estate.

Mr Vitner, points out that commercial real estate and residential real estate have very little in common and that the markets have very little impact upon each other. One major difference that is identified is the role of professional investors and novice “investors”. Mainly, that commercial real estate has nearly no provision for novices.

Where residential real estate is valued by the future benefit of an existing product, commercial real estate is valued by a factor of its income producing capacity. When calculating the rental income potential of residential real estate and comparing it to commercial real estate over the last decade, commercial real estate has mirrored the growth in residential real estate actually equaling the ratio in 2007. The equality between the two ratios is due primarily to the decline in residential yield over the last two years.

In considering commercial real estate market there are two major factors to consider. The first is the Cap Rate, which is equal to the net operating income divided by the total purchase price. The other is the vacancy rate. The chart below from the Wachovia report shows the history of Price Per Foot, Vacancy Rate, and Cap Rate.

The economists at Wachovia are predicting that the next major correction will be in the commercial real estate market due to high and increasing vacancy rates. They predict that prices will fall 15-20% nationwide in commercial real estate over the next two years. An increase in vacancy rate is expected primarily from the contraction of the economy and the decrease of discretionary spending in the US economy. The anticipated result will be an increase in rationalization on current market rents—which will drive prices down. This predicted trend is a national trend that will impact some cities more than others.

It is important to remember that all trends in the economy are cyclical.

The Chart below from Money.com shows a snapshot of the history of the US economy over the last 15 years. The times of growth are followed by times of recovery. The frequency of growth and degree of correction vary at times largely.

While the times of growth are great, it is important to keep in mind that all growth will require times of correction. When the necessary corrections occur, growth will begin again.

< Prev		Next >

[ Back ]