Commercial Real Estate Recovery-Propaganda?

It isn’t often that a member of the tribe stands up and gets a weighty issue of his mind.¬† But that is what Robert Canter has done.

His credentials are noteworthy.

He has been a commercial real estate professional for 35 years with experience in brokerage, sales, consulting, asset management and business development.

Canter is the president and founder of Performance Realty Solutions, a Rockville, MD-based commercial real estate consulting firm he founded in 2004.

Prior to starting Performance Realty Solutions, he was, from 1998 to 2003, the sales training director and in-house commercial real estate expert for Costar Group, Inc., a Maryland-based provider of commercial real estate information and web based software.

So when Robert Canter stands up and asks, in a Gerson Lerhman Group commentary, “Is the highly publicized commercial real estate recovery in the U.S. fact or fiction?”¬† industry brethren listen.

He basis his response on Federal Reserve Chairman Ben Bernanke’s recent assessment of the United States’ economy and what has been reported by the various media outlets regarding the recovery in the commercial real estate sector.

“If you just came out of coma of 2.5 years and read any business paper/section etc, you would have to believe the United States’ economy is actually faring well and the commercial real estate market is well on its way to being as healthy as when you lapsed into a coma,” Canter says.

“What is being reported is pure unadulterated fantasy or in other words pure propaganda.

“The following is a list of facts which contradict the fantasy that is being reported:

1. Unemployment is still around 10% with real unemployment tracking around 17%+

2. Credit is still extremely tight with only those individuals and companies that have stellar credit ratings even being considered to be credit worthy.

3. Commercial real estate lending is still virtually nonexistent, with only so called “Trophy” properties being considered for loans. The LTV even for the best of the best is still 65%-70%, not exactly conducive to wanting to get a loan. Refi’s are also problematic due to the decrease in base property values which have placed close to 50% of all commercial properties under water.

4. Vacancy rates are still extremely high in both the Office and Retail Sector. Has there been some leasing going on, of course, but not to extent to make a large enough dent to anticipate rental rates going up.

The only sector taking space is the Federal Government, good for the Washington DC area landlords but that is it. So you have your tax dollars are basically bailing out the private commercial real estate industry in the DC region. And that is a good thing for anywhere but DC why?

5. CMBS delinquencies are rising and are at the highest rate in history. Special Servicers cannot keep up with the rate of defaults.

6. Bank failures are continuing and it is predicted the total number of Bank failures will exceed the totals from the early 1990’s. This does not bode well for mid to small business lending, as much of the bank failures have been community banks and smaller banks who have too many commercial real estate loans, especially construction loans

7. SBA loans are few and far between. It was just reported last week in the Wall Street Journal the SBA loan program which guarantees 90% of the loan is out of money…Does anyone believe these banks will do SBA loans with less than the 90% guarantee? DO NOT COUNT ON IT.

8. Retail sales have been rising and anyone tied to the retail real estate sector is acting just short of giddy…but the current consumer spending that had been realized over the last couple of months is not sustainable and already there are signs consumer confidence is retreating once again. Consumers are saving more than at anytime since the Great Depression.

9. Manufacturing output has increased…yippee, not so fast as the production is due to replacing inventory not because of demand as companies curtailed new orders for so long existing inventory levels were dropping to critic levels.

10. The Major Banks (Too Big To Fail) are in fragile shape at best. It’s only due to revised accounting rules and government bailout money have they been able to survive. Their balance sheets are another work of fiction.

11. Government spending is out of control and getting worse.

12. Taxes of all kinds will be going up substantially, and add the ‘Carried Interest” tax repeal and you will have a devastated commercial real estate sector giving back whatever small or better said minuscule gains that have been achieved so far.

13. Companies are not hiring nor will they when the Obamacare health law makes it ugly appearance on Corporate America’s balance sheets.

14. The political climate in the United States can only be described as Toxic. It breeds lack of confidence which spills over into the Private Sector.

15. The Gulf Oil Spill will have a devastating economic impact not just in the Gulf States but will be felt throughout the economy.

16. The European Debt Crisis is not going away, and the United States is heading in the same direction which again will hamper business expansion.

17. The only growth industry in the United States is the Federal Government. Our so called leaders have not figured out that the more you tax and spend the lesser amount of money is available for the Private Economy and for people and companies to spend.

18. Interest rates are low for the moment, however, when you begin hearing the Federal Reserve Presidents in various Districts talking about rate increases, let’s just say where there is smoke there is fire.

“These low rates are helping the housing market to some extent. But wait a minute…what about all the backlogged foreclosed shadow housing inventory that the NAR and Government forgets to talk about.

“That is artificially propping up house prices…but those same banks that are holding these foreclosed properties¬† are being told by the Feds, just let them trickle out so as not to flood the housing market.

“The cumulative effect of the all the above is why the commercial real estate market will remain extremely troubled despite what the propaganda says otherwise.”


Mark Gerson
Mark Gerson is the executive chairman of New York City-based Gerson Lehrman Group (GLG), which he co-founded in 1998.

Gerson Lehrman Group Councils are networks of consultants, physicians, scientists, engineers, attorneys, market researchers, and other professionals from around the world.

According to its web site, Gerson Lehrman Group focuses exclusively on providing a platform for consultation and collaboration. GLG does not write reports or take published positions, make product recommendations or offer investment advice.

Article from Real Estate Channel