Dotzour: Commercial real estate not in recovery mode

Recovery for the commercial real estate market hinges on three key markers – only one of which looks to be showing any sign of improvement, at least according Texas A&M Real Estate Center Chief Economist Mark Dotzour.

Dotzour, while making his outlook presentation for the 2010 commercial real estate market at the Society of Commercial Realtors breakfast held Dec. 1 at Colonial Country Club in Fort Worth, said the market’s recovery depends on corporate earnings showing improvements, unemployment numbers improving and a smattering of deals getting done to produce fair market comps for appraisers. And so far, only corporate earnings are improving some, but not enough to put a dent in the country’s unemployment numbers, he said.

But all markers are out the window without consumer confidence, he said.

“When corporate profits are up, people should stop firing people,” Dotzour said. “The problem is the … good businesses that should be hiring aren’t and the question is why? It’s because of the uncertainty. You can’t insure against uncertainty,” Dotzour said. “… The uncertainty is raising capital gains taxes, raising income taxes, changing all the health care rules, maybe they’re good, maybe they’re not, but when you don’t know what they are, business people – here’s what they do: nothing. Accumulate cash, sit on the sidelines and wait until it’s over.”

Dotzour said consumer confidence drives a domino affect in the economy: if consumer confidence is up, people buy, which drives corporate profits up. If corporate profits are up, theoretically, businesses hire more people, which slows residential foreclosure rates and fuels commercial real estate absorption, rental rates and sales prices. But without that confidence, the economy will continue to remain in a stand-still.

“We’ve got to start generating jobs. All this other stuff is interesting – maybe it’s useful, maybe it isn’t,” Dotzour said.

According to the Business Roundtable, small businesses, which employ about two thirds of American workers, report zero intentions to hire in the coming six months. The same report shows that of large corporations, only 40 percent say they’re going to fire and 13 percent say they will add jobs as of the third quarter of 2009.

A key indicator for commercial real estate transactions lies in comps, Dotzour said, but many large institutional banks aren’t eager to make loans because loans require comparable market analysis or comps and that could mean banks would have to recognize losses in their real estate portfolios. Even so, Dotzour said eventually, transactions will happen, comps will be made and losses must be recognized.

According to the Board of Governors of the Federal Reserve System, the percent change in the number of commercial real estate loans in 2009 compared to 2008 hit zero.

“The flood gates are going to unleash as soon as we get some comps,” he said. “As long as there are no comps, I can value [commercial real estate] at whatever I want, but as soon as I get comps, I have to mark them down. So how do I keep from marking them down? I keep the market from clearing so there are no sales. At some point, there’s going to be enough sales where [appraisers] say ‘I’m sorry pal, … I’ve got five comps right here.’ At that point, it’s going to be over and that will be the beginning of commercial real estate transactions again because the market will clear at that point and buyers will start piling in.”

Dotzour said the key for real estate professionals and investors alike is coming up with a plan to sustain until the market works itself out. And when that happens, Dotzour said, and prices are right, comps are recognized and the country’s job market is stabilized, it will be game on.

“Get ready for it. Think it through. How are you going to prepare yourself and your clients to make enormous sums of money if you can stick through here and wisely figure out by knowing what’s going on and facing the facts to get in at the right time because I promise you people will make lots of money in real estate now just like they did after the RTC in the late 80s,” Dotzour told real estate professionals. “It’s a similar type of environment. There’s money to be made – you just have to stare it in the face honestly and figure out how do I do it? I don’t do it by hiding and pretending it’s now what’s going on.”

For Dotzour’s 2010 real estate outlook, see the full story in the Dec. 7 issue of the Fort Worth Business Press.

ahowe@bizpress.net