Is Commercial Real Estate too Strong?

After avoiding any major downturn when the rest of the property market, particularly residential housing, went bust, the commercial real estate sector has for the most part in South Africa, been completely resilient with little or no fall out. Both listed and non-listed directly owned commercial real estate has performed extremely well during the global downturn and has performed in direct contradiction to residential real estate. There have been a few bankruptcies of commercial real estate but these have all arisen due to failed investor schemes and not the underlying asset class.

In the USA, where commercial real estate has recently made an astounding recovery, several analysts warn that “commercial real estate has taken to the comeback trail way too fast, and might come to a point crashing once more”.

This is one of the fastest recoveries in commercial real estate history, says Jones Lang LaSalle global strategist Jacques Gordon. He believes that given the severity of the economic recession as a whole, “it should have taken more time than usual, not less, for the real estate market to rebound”. He cites high unemployment and quickly appreciating office properties as an example of the unrealistic recovery, saying that there is no reason for these two trends to exist simultaneously. Another analyst, managing director for Northwestern Investment Management Company Gregory Walz, describes the market as becoming, “too frothy, too quickly”.

However, not everyone agrees that the swift improvement is a problem. In fact, accounting firm Deloitte, recently released a report indicating that the markets are being “fuelled by the availability of capital, low prices, loan restructurings and alternative financing methods”, and that these factors would pull the commercial market through today’s perilous waters. Deloitte believe that the commercial markets are stabilising in part because, “it was commercial real estate that felt the first impact of the downturn”. Deloitte analysts did emphasise that risks associated with refinancing remain high and that this issue will play a major role in the ultimate stability of a commercial recovery.

In South Africa, whilst we may still see some distress in failed residential property developments and leisure properties, we believe that retail, industrial and office properties will remain resilient and strong. South Africa is still going through rapid urbanisation and one must never forget that as a developing economy, South Africans are shopping, acquiring and still developing. One very rarely sees empty shopping centres in South Africa, and while office space is a little more concerning, the fundamentals for a strong commercial property market is in place. If the American commercial real estate rebounds before ours even goes down, it bodes well for the local commercial property sector to have almost escaped the current global downturn.