Commercial Real Estate Finance

To say America has changed in the last 60 years would be a bit of an understatement. From its position as the darling of the global economy following World War II to its more complicated status in 2012, the U.S. has transformed significantly as a result of political, cultural, technological, and of course economic pressures–from both inside and outside its borders.

This ongoing change presents both challenges and opportunities for those who invest in commercial real estate. As The Atlantic reports,

The spectacular graphic compares employment by sector in 1947 and 2007 and its most important lesson is a whopper. Manufacturing and agriculture employed one in three workers just after World War II. Today, those sectors employ only one in eight.

The decline in employment that manufacturing and agriculture have experienced can be attributed, in part, to technological advances. In the U.S., these industries still produce a great deal, though it’s no secret the market has outsourced much of its manufacturing and agricultural duties to countries that can do it more cheaply. Despite the lip service every politician gives to bringing manufacturing jobs back to the U.S., from a simple economic perspective, it seems unlikely this will happen in any but the most specialized manufacturing sectors. 

For CRE investors, this reality should have a significant impact on decisions regarding industrial properties, manufacturing centers in particular. As the Atlantic article goes on to say, the most significant workforce increase in the U.S. took place in white collar jobs–finance, real estate, etc.–which explains the huge number of office properties just about everywhere in the country. However, with the recession, many of these office buildings were hit with low absorption and decreased rents.

Of course, high-tech companies, the major growth area in the U.S. over the last few decades, have been major factors as well, influencing CRE investment in markets and properties where they flourish. IT and software ventures have brought increasing value to flex space, an asset whose cheapness and adaptability have proven ideal for such a youth-driven and (in some ways) anti-white collar sector.

All of this is to say CRE demand correlates with the growth and decline of industries (a no-brainer), which in turn reacts to a much more global and complex set of conditions. The moral here, as I see it, is that single-industry cities (and those who invest in them) are at the greatest risk. Just look at Detroit.

Cities with a more diverse market and workforce offer the most opportunities, and most stability, for CRE investors. As our friend Coy Davidson explains on his blog, Houston, Texas and its CRE market are doing quite well. This is thanks to an economy which–while known for hosting oil companies like ConocoPhillips (COP), Citgo and BP America (BP)–is home to many other industries as well.

#CRE #finance

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