Since 2008, when the bottom fell out of the housing and stock market, pundits, analysts and economists have been calling for a major crash in the commercial real estate market. It's yet to happen. True, Blackstone's 2007 purchase of the Sam Zell's Equity Office Properties for $39 billion proved to be the market top, but the commercial real estate disaster that accompanied the recession of the early 90's has yet to be realized.
Today's guest on the Daily Ticker, Mort Zuckerman chairman of Boston Properties, one of the largest REITs in the country, doesn't think the other shoe is going to fall. That's not to say business is booming. As is always true in real estate, it's about three things: location, location, location.
Suburbs vs. Cities
Smaller town shopping centers are struggling. "They don't have the big tenants with the strong credits that can, in a sense, pay the rent through the difficult times," says Zuckerman. Meanwhile, "in the major cities, in particular it's been much less of a problem." Zuckerman says that's because the larger retail chains and areas with strong financial communities have been able to weather the storm.
Class A properties that Boston Properties specializes in, Zuckerman says, have not suffered high vacancy rates. In fact, demand for higher end properties is strong. "When everybody's rents go down, what we've found over many years, is that people will go into the best buildings because they say, 'I now can afford it.'"
Commercial vs. Residential
Three year after the Lehman Brothers collapse, Zuckerman says, commercial real estate is still a better buy than single family residential homes.
"We are not out of the woods on single family residential housing," he notes. "The reason for that is there must be somewhere around 8 or 9 million homes that in one form or another have to be cleared through the market before the market restabilizes." He's referring to the number of homes in foreclosure proceeding and the millions more that have underwater mortgages.
But what about all the bullish reason to buy: historically low interest rates, more affordable prices and rising rents? That's "not enough" to turn the tide, according to Zuckerman. What the market needs is confidence. "Until that changes, all of these statistics, in a sense, will be destroyed," by a lack of confidence in the market.
"The American consumer is not stupid," he says. "And they don't want to buy assets that are going down in price." That may be true, but there must be millions of consumers who look back on their subprime mortgage with regret.
- Mort Zuckerman
- Equity Office Properties