Even with continued economic challenges experienced by companies, individual consumers, federal, state, and local governments the U.S. economy continues to show signs that it may be slowly heading toward stabilization.
Many experts say the recession has bottomed out and some economists are saying that the bottom may have happened about a year ago in San Diego as well as across the rest of the country. Some experts say the opposite…
Good Sign’s for the Economy:
At a recent meeting of Financial Executives International (“FEI”), Robert DiClemente, U.S. Economist at Citigroup said:
• “We’re finally seeing job growth!”
• “200k to 300k job losses to 125k new jobs in the month of March”
• “44% of people who are unemployed have been out of work for at least six months”
Another recent good sign was that in May 410,000 jobs were created across the United States.
A few retailers are beginning to report increases in revenue and are increasing inventories, and manufacturers are getting in gear to support them. In certain industries, executives are going back to work. Logistics and shipping industries report steady increases in orders. Some industries are starting to report consistent month over month revenue gains. These are not large gains, but they are consistent and they are increasing.
Continued Challenges Call for Cautious Optimism
Despite the good news above negative events could derail the potential growth supported by the good news above. Banks selling commercial properties at discounts to market could cause real estate markets to gain ground through increased transaction volume and lending activity, while creating a further decline in already significantly depressed values in San Diego and all commercial real estate markets.
With commercial real estate lenders seeking to off-load foreclosed properties, investors are making very aggressive, low-cost bids. In more than a few cases, banks are acquiescing to such offers in the interest of moving those properties out of their defaulted loan portfolios. The market expects this trend to continue.
So, as the volume of foreclosed sale transactions increases, the overall value of commercial real estate, will likely continue to decline for some time.
So, at the same time, commercial real estate markets could experience increases in sale transactions with declines in value. It is reasonable to assume that as bank pipelines of foreclosed properties empty and the volume of low-priced lender inspired transactions subsides, prices would then stabilize and begin to rise. But, when will that happen?
In a recent television interview, Andrew Florence, President of CoStar, the major commercial real estate database, was quoted as saying: “$1.4 trillion in commercial mortgage debt will expire in the next few years.”
With this much debt expiring and being replaced with mortgages at lower loan-to-value ratios based on lower valuations, how long will it be before commercial real estate prices begin to firm up again? How many billions of dollars in value could be lost until then?