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A Simplified Theory of the Commercial Real Estate Recovery

 

The Harrisonburg and Rockingham County  commercial real estate market has witnessed significant improvement in the last year.  In fact, many believe that commercial has surpassed residential on the road to recovery.  How could this happen? Especially since it generally accepted that  commercial growth is derived from residential growth; generally lagging behind a bit as developers assess the market. In the 2000’s as residential growth hit its peak, commercial growth did too. The same is true of large growth periods in other decades. Commercial can surpass residential in terms of recovery because,

  • What’s important about residential growth isn’t necessarily the new houses being constructed, but the spending that accompanies the new construction. The area has not stopped growing, it has just restrained spending, and as a result, demand for commercial space has fallen. As consumer confidence locally begins to improve, so to, will spending.
  • Consumer confidence in improved by income stability. In other words, when consumers feel more secure in their job, investments, etc, they are more likely to spend. Unemployment in the Harrisonburg and Rockingham County area appear to have hit their peak in the 1st quarter of last year. Likewise,  data from the Virginia Department of Taxation have suggested that sales have trended up over the last year.

  • Increased spending will bring entrepreneurs seeking to capitalize (in need of space) and a tightening of existing supply ultimately leading to demand for new construction. The area was aided substantially by the restraint demonstrated by commercial developers during the height of the bust. Instead of trying to aggressively pursue every new development opportunity, developers took pause, assessed the residential situation (in the mid-2oo0’s), and decided against building.  As a result, the supply is, mostly, as it was.
     

    The first quarter of 2011 represented an extremely strong start to the year. With nearly $7 million of commercial real estate sold (excluding land) making it the best since at least 2006. As expected, the number of transactions also increased. Just how much was truly impressive. The first quarter nearly exceed the previous two quarters combined and was the best quarter since the first quarter of 2008. Statistics aside, there is a growing sentiment (the first quarter of 2011 helping quite a bit) among brokers that the market is improving, albeit slowly.

    This thought elsewhere seems to be a bit more aggressive. According to anarticle in the April 18 edition of USA Today,“The commercial real estate market is bouncing back with a vengeance andexceeding forecasts from analysts. The signs are clear: The number of troubled loans are dropping, occupancy is soaring, and office building sales are rising in some of the country’s largest commercial real estate markets.Meanwhile, mortgage defaults for office, retail, and industrial building loans are decreasing for the first time since 2005 in the fourth quarter. Real Capital Analytics economist Sam Chandan expects they will fall even further,adding that the “worst-case scenarios have been avoided.”

    There is a lot yet to prove in terms of the recovery fully taking hold in the Harrisonburg/Rockingham County market, but the cumulative results in the commercial market since the 3rd quarter 2009 seem to be indicating that we could be heading for equally bullish sentiments in the near future.

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