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COMMERCIAL REAL ESTATE OVEREXPANSION.
Term Paper ID:18830
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Essay Subject:
Causes & effects. Vacancy rates, workplace innovations, financing, credit, defaults, megaprojects.... More...
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Paper Abstract:
Causes & effects. Vacancy rates, workplace innovations, financing, credit, defaults, megaprojects.
Paper Introduction:
OVEREXPANSION OF COMMERCIAL REAL ESTATE
I. Introduction
II. Causes
A. Vacancy rates for existing space did not preclude new development.
B. Companies underwent technological transformations during the 1980s which reduced their need for commercial space.
C. Flex-time and other workplace innovations enabled companies to get increased use of their current space.
D. Financing was easily available from a number of different institutions.
III. Results of overexpansion
Text of the Paper:
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Between 1982 and 199 , morethan 1.5 trillion dollars was invested in commercial real estate, primarilyby large institutions such as banks, savings and loans and pension funds(Sheets 56). "Vacancy Rates, Competition in Business Parks Generating Generous Concessions." Site Selection 33 (1988: 1384-139 .Rudolph, Barbara. 199 : 5 -52.Sheets, Kenneth R. "The Age of the Megaproject." Institutional Investor 22Aug. The result for developersalready in trouble is a virtual inability to obtain new funds (Ford 16). E. During the 198 s, commercial real estate development soared. As a result of the overexpansion in commercial real estate, lendersand other investors have grown reluctant to put as much money into realestate as they formerly did, and they are seeking other investmentopportunities. Commercial mortgagedelinquencies increased 25 percent in 199 over 1989, and bankruptcy amongdevelopers increased significantly during the 198 s. 199 : 35-36.----------------------- 7 Developers and owners are having to offerconcessions that weaken their current capital structure, and lenders, whilenot foreclosing on properties as quickly as they once did, are less willingto invest in new projects. C. Flex-time and other workplace innovations enabledcompanies to get increased use of their current space. B. The 198 s saw increased attention by companies to their incomestatement and balance sheets as they sought ways to increase theirproductivity. Financing was easily available from a number ofdifferent institutions.III. This compares to a vacancy rate of fivepercent in 198 (Sheets 56). A slowdown in commercial real estate growth isinevitable for the coming decade compared to the 198 s, and the industrymay once more become responsive to customer demand. Theseprojects combine private financing with public financing, and offerresidential, commercial, retail and mixed-use sites within one large area.The government subsidies enable larger developers to take advantage oftheir strength, and possibly ride out the current downturn in other aspectsof their business (Karp 126). D. "Downtown Blues." Time 5 Nov. B. These tenants were also able to relocate tosmaller facilities. In some cases, the result is an agreement whichgives greater control of the property to the lender, but which alsoincreases the likelihood that the lender will recover the investment(Rudolph 5 ). But parksbuilt during the 198 s faced the most severe occupancy problems in 1988:8 percent were less than half filled, and only 11 percent were three-fourths occupied (O'Connor 139 ). Parks built in the197 s also had lower occupancy rates than the older parks (45 percent and26 percent were half and three-fourths occupied, respectively). Thisresearch examines the overexpansion of commercial real estate, includingits causes, and the outlook for the commercial real estate market for the199 s. Concessions to prospective tenants. As the 198 s rolled into the 199 s,however, vacancy rates increased, commercial mortgage defaults increased,and financing became harder to come by for commercial projects. Creative approaches to commercial loan defaults. The results of such efforts have been mixed. Business parks which openedin the 195 s were more than 5 percent occupied in 1988, and 42 percentwere at least three-fourths occupied. Parks built in the 196 s hadsignificantly lower occupancy rates: 44 percent were more than 5 percentoccupied and 32 percent were three-fourths occupied. Flex-time, home computers, FAX machines and cellularphones all contributed to a workforce that was able to work from home, orin shifts, which permitted companies undergoing expansion to make betteruse of their existing facilities (Abbey and Springwater 28). Refinancing of existing debt by developers. IntroductionII. News and World Report 8 Jan. "Building Up to One Great Big Letdown." U.S. Companies are forging real estate plans toimplement a long-term policy which has strict guidelines regarding expensesand returns, even when space is leased. 1988: 126-132.O'Connor, Michael. "Corporate Real Estate and OfficeMarkets in the 199 s: Changes, Impacts and Opportunities." Site Selection35 (199 ): 28-3 .Ford, Rita D. D. F. At the same time that companies were increasingly concerned withtheir space requirements, they also began committing more resources toanalyzing those requirements and maximizing the return from their spaceinvestment. The supply however, was expanding. Free rent for a given periodof time (as long as a year, in some markets) and amenities such as exerciserooms were being offered to prospective tenants in highly competitivemarkets. Formuch of that decade, economies were growing, demand was strong andfinancing was readily available. "Assessing the Downturn in the New England Real EstateMarket." Bottomline 6 Feb. At the same time, a number of organizations were downsizingtheir operations as a result of implementing computer systems and otherwiseimproving their productivity. Managers are also beginning toview the real estate investment as a profit center, which permits them toallocate costs on a market basis (Abbey and Springwater 3 ). With the demand decreasing and the supply increasing,developers and landlords were forced to provide concessions and amenitiesthat they formerly would not have considered. Causes A. Institutions which have existing loans in the commercial realestate sector are learning to be more creative in structuring those loans.Lenders are also being more careful in the ways they evaluate commercialloan applications. Some commercial real estate owners areturning from commercial real estate to retail, offering formerly commercialspace to warehouse retailers such as Price Club ("Real" 35). Developers who arenot filing bankruptcy are facing the unpleasant task of working out thedebt with the lender. Tightening of credit availability. Companies underwent technological transformationsduring the 198 s which reduced their need for commercial space. Overall decline in commercial development. However, while these numbers indicate thescope of the problem, they do not accurately reflect the depth of thesituation. The overexpansion of commercial real estate during the 198 sillustrates the dangers of a market which shifts away from customer drivendemand to capital funded supply. 199 : 56-57."The Real Estate Connection." Chain Store Age Jan. Other developers are turning towardso called "megaprojects" which offer government subsidies to developers whowork to renovate downtown areas and other blighted neighborhoods. 1989: 14-16.Karp, Richard. This credit tightening, also spurred by the recent savingsand loan crisis, has put additional burden on developers who are no longerable to simply increase their credit lines in order to cover short-termlosses. Recognizing that the facility expense is generally second onlyto the expense for labor, companies are shifting from leased space to ownedor build-to-suit facilities. In early 199 , nearly 2 percent of the nation's available officespace was empty, with another 185 million square feet estimated to be readyfor occupancy by the end of 1992. At the same time, developers with a high level of borrowed moneyat stake were also trying to refinance loans in order to improve their debtstructure (Rudolph 5 ). While the nationalaverage occupancy rate hovers at approximately 2 percent, it is as high as3 percent in New Haven, Phoenix and Dallas. Vacancy rates for existing space did not preclude newdevelopment. The overexpansion of commercial real estate has had effects in othersectors of the economy, as well. As these facilities werevacated by tenants, they increased the amount of commercial real estateavailable. Works CitedAbbey, Douglas and Richard Springwater. Results of overexpansion A. The question is, how didthe overexpansion happen? The lack of occupancy in newer business parks, which are onecomponent of commercial real estate, illustrates the problem ofoverexpansion, and even describes the fact that overexpansion is hurtingnewer developments which lack long-term tenants. OVEREXPANSION OF COMMERCIAL REAL ESTATEI. C. Demand for commercial real estate during the 198 s was thereforeshrinking. Megaprojects that are publicly financed. Some lenders are requiring commitments from tenantsbefore approving commercial real estate loans, while others are locking ata higher ratio between assets and liabilities. Business park analysis provides a clear picture of theevolution of the commercial real estate glut. It was a decade in which mergers and buyouts becamecommonplace and during which traditional concepts of how and whereemployees should work became challenged by technological innovations.Mergers and improved technology, such as computers and robotics, renderedsome existing company facilities unnecessary. This putsadditional burdens on owners of traditional retail space, who face similarvacancy rates as office space holders.
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