July 2009
Recessionary Strategic Planning for
Commercial Real Estate Professionals
Presented by Mark J. Mayfield & Randy Graham
Managing Directors, Sperry Van Ness – Rock Hill, South Carolina
As I speak with clients, co-workers, and industry pundits, the one thing we all agree upon is that the economy is bad, and that we haven’t found the bottom yet…especially where commercial real estate is concerned. While opinions may vary as to exactly where the market is headed, and the timing surrounding any major shifts in direction, everyone reading this paper understands one thing; the markets are fluid, evolving, and ever changing. Therefore the conundrum that those in the practice of professional commercial real estate are faced with is how to best position their portfolio to minimize the risks associated with market uncertainty, while at the same time maximizing current and future returns.
In last month’s article, and as a prelude to the text that follows, I shared some high-level philosophical thoughts on the value of creating a strategic asset management plan. In this month’s piece I’m going to attempt to take guess-work of market prognostication out of the equation by not relying on a crystal ball approach. Rather I’ll take a more granular journeyman’s approach in providing advice on tactical direction based upon the actual data and events we know to be true…no hype, no rhetoric, just the facts.
What We Know
All of the recent financial data that has been released over the past several weeks has indicated that an economic recovery won’t happen anytime soon. In a public speech last week, President Obama indicated that unemployment will continue to rise in the near term, and we all know that the trickle-down of rising unemployment does not bode well for commercial real estate. While most of the media attention has clearly been focused on the trouble in residential real estate markets, I feel the larger risk to the economy lies in the risks associated with defaults on commercial assets.
According to data provided by REIS, defaults and delinquencies on hospitality, retail, and office properties have more than doubled in the last six months alone. Even more disconcerting is that default rates for industrial and multifamily properties have increased more than 80% during the same period. It doesn’t take a rocket-scientist to understand that this sudden up-tick in late payments and defaults has many observers feeling that the next shoe to drop on the economy will be a collapse of the commercial real estate market.
While the risk is still difficult to quantify, we do know that it is highly probable it was underestimated in the FED's recent stress test of 19 major banks. The results of the stress test released just a few weeks ago, projected that should the recession worsen, the losses from commercial real estate loans could hit $53 billion, or 8.5 percent of their overall loan losses over the next two years. We know that the government historically underestimates declines. This I believe is particularly true given that the stress test did not include the majority of the regional and local lenders, which hold a big chunk of the nation's $3.5 trillion commercial property loans on their books and who remain particularly vulnerable to further economic declines.
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In 1996, Mark Mayfield and Randy Graham started in business together and in 1999 started their own company Southern Commercial Real Estate, LLC (“SCRE”) in Rock Hill, South Carolina located 15 miles south of Charlotte, NC. With a successful track record and established entity, SCRE expanded its services and national reach on January 1, 2007, by joining forces with a nationally recognized leader in commercial real estate brokerage, Sperry Van Ness, to form Sperry Van Ness/Southern Commercial Real Estate, LLC.
- Sperry Van Ness was founded in 1987, when Rand Sperry and Mark Van Ness created a commercial investment real estate firm with one key mission: To create unprecedented value for commercial real estate investors. Today Sperry Van Ness is one of the largest, most respected and fastest growing commercial real estate brokerage firms in the industry.
- Sperry Van Ness currently has more than 1004 advisors internationally.
- Sperry Van Ness is located in more than 150 cities across the US, as well as in Costa Rica and Panama.
- Sperry Van Ness completed over $11.6 billion in sales and leasing transactions in 2007.
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Mark J. Mayfield
Managing Director|BIC
Randy Graham
Managing Director
1926 India Hook Road | Rock Hill, SC 29732
803.325.1000 | 803.325.1214 | www.svn-scre.com | | info@svn-scre.com