"Reviving the Economy: Real Estate"-Commercial Real Estate
Thursday, April 02, 2009SUZANNE PRATT: Tonight we continue our month-long series, "Reviving the Economy: Real Estate," with a focus on commercial real estate. Joining me now with her outlook for the sector is Susan Smith, a director in the real estate group at pricewaterhousecoopers. Susan, welcome to the program.
SUSAN SMITH, DIR., REAL ESTATE, PRICEWATERHOUSECOOPERS: Nice to be here.
PRATT: There seems to be a perception out there that what is going on in commercial real estate is as bad as what is going on in the residential market. Is that an accurate perception?
SMITH: You know, you really need to separate what goes on in the residential market to what goes on in the commercial real estate industry, although there are some similarities. One of the biggest differences right now is that the commercial real estate industry, even though it is struggling in terms of tenant demand and so forth, it doesn't have that oversupply that is really burdening the residential market right now. So you really do need to separate them. Because they really, even though there are a little bit of similarities, they are separate in performances and fundamentals.
PRATT: Is there weakness in all categories throughout commercial real estate? Are we seeing the same weakness in the retail sector as we might see in office space?
SMITH: All sectors of the commercial real estate industry are struggling. But the degrees of the struggles are definitely different. I would say the two sectors really feeling it the worst right now would definitely, number one, be lodging. Lodging is seeing a drop-off in demand on both a leisure side and also a business side. And that sector tends to fall off first once the economy starts to deteriorate. The second sector that is really suffering right now would definitely be retail. Again, any properties where you are seeing the need to have discretionary spending and since you have consumers pulling back and not spending as much, those sectors are also struggling the most.
PRATT: And what about your outlook for when we might expect to see a turn around? I know that commercial real estate only really just recently slipped into the same kind of downturn that we're seeing in residential. So when, when would you say we could forecast that we going to see a comeback?
SMITH: The commercial real estate industry's performance lags what happens in the economy because if you think back about what happened in the residential industry in terms of the housing bubble, that was almost two years ago, where all the problems in commercial real estate in terms of the fundamentals and supply and demand have really only started about a couple of quarters ago. So you definitely see that lag factor and that lag factor is going to continue. So if the economy can show some type of stability in reaching a bottom in 2009, it probably won't be until 2010 and 2011 for some of these sectors to come back. And when you see the recovery, you're not going to see again the sectors recover simultaneously and all together. You're going to first see recovery in the sectors that provide housing, like apartments and multifamily and that move goods like warehouse and industrials. And then you'll see a later recovery in the office sector, anything that provides goods and services and retail. So again.
PRATT: It is in that apartment sector, I was reading in your report where you see the potential for the greatest investment opportunity. Why is that?
SMITH: Well, you know, the apartment market right now is really benefiting on one hand because of what is happening in residential. If you can't afford to go out and buy, get a mortgage and buy a home, you're going to rent. You are going to look for a rental apartment. So in that respect, the apartment sector is having a benefit. But it's also not having a benefit from the number of condominiums that were built and that are now turning into rental units. But typically when you see a recovery, it does happen first in housing. People feel confident and they'll go ahead and rent.
PRATT: All right, I think we have to leave it there. Thank you very much for joining us this evening.
SMITH: Thank you very much.
PRATT: My guest Susan Smith of pricewaterhousecoopers.
