According to the Commercial outlook published by the National Association of Realtors for first quarter of 2008: “The Mid-West continues to experience industrial and office difficulties. Markets like Detroit and St. Louis as well as many markets in Ohio could certainly use a boost in the economy. Until that happens, commercial real estate will continue to be sluggish.”
After reading the report and looking closely at the metro numbers its clear that St. Louis has higher than national average vacancy rates for office, industrial, retail, and multi-family properties. On the surface this would suggest that St. Louis is not a good place to invest in commercial properties at the present time. However, money is made in real estate when a property is purchased. High vacancy rates mean that owners are feeling a pinch currently, and investor activity has slowed. This translates to a situation where supply is increasing, because owners are willing to sell while demand is decreasing, as investors wait to see what happens in the market and look for favorable financing. This means there should be some good value purchases available for the savvy investor.
If your reading this with a critical eye, as any good investor should be, you may be saying something like, “Howard, of course you can buy property cheaper when vacancies are up and buyers are limited, that’s because the two ways to generate cash flow in real estate, leasing and sales, are dried up. How do you make money with the property? The answer is that you need anticipate the market. This is accomplished by gathering information about historical trends, current market, and indicators of future growth.
Real Estate, like most markets, is cyclical, and we are in a down market. Also, we are in an election year, where historically the economy has done better than average. This would indicate that there is a possibility next year will be even worse than this year in the economy. Also, the United States is currently at war. Historically the US has been hit with inflation pressures in the years following a war. There is a good chance that inflation pressures over the next few years as the US begins to withdraw from Irag coupled with high energy and food costs will force the fed to increase interest rates, which can translate to higher lending rates.
The sub-prime fallout in today’s market is helping push prices down for residential housing. In an article in the St. Louis Post Dispatch “Chris Krehmeyer president and chief executive of Beyond Housing, says he expects foreclosures to remain high until at least next year.” That means that there will be some foreclosure bargains over the next year. During the real estate boom, many home buyers who typically could not attain financing were able to borrow money to buy a home. These types of borrowers will not be able to borrow money as lenders tighten lending guidelines. This reduces the number of buyers in the market and decreases demand for housing purchases. However, this increases demand for rental housing. These buyers who historically have rented are going back to the rental market. During the housing boom developers were building speculative housing and buying developable land for future development. They built more housing than there was demand for, and now many of these neighborhoods are sitting empty. However, housing construction has decreased substantially. As these developers struggle to pay their loans and foreclsure rates increase, banks are being squeezed. This will continue to put pressure on banks to tighten commercial lending criteria and increase fees. Look for investment capital to continue to get more expensive and difficult to secure.
I’ve outlined the major housing specific forces that are in play in St. Louis currently. One non-housing specific force that is important to consider is the economic environment in the metropolitan area. The outlook looks good for the St. Louis region. Site Selection Magazine ranked St. Louis #3 for overall economic health in the country. They site the large number of corporate facility projects in 2007 and many slated for the next few years. Overall, it seems like the current favorable interest rates combined with depressed housing prices makes it a great time to find good prices on real estate in St. Louis. There is a good chance that rates will rise in the next couple of years. The economic strength and job growth in the area, makes it likely that demand for commercial space will increase. This will begin to push prices up and make a nice return for those who bought property at the current low prices and with favorable mortgage terms.
