It’s been said that franchising (and small business) will be instrumental in helping the economy recover. Yet, a recent article regarding the commercial real estate market may shed a new light on that prediction. Already facing tighter credit guidelines, franchisors may now be faced with fewer suitable locations for new franchisees that will further hinder growth initiatives.
The article, “Is Commercial Real Estate in Bubble Trouble” was originally posted on the Fish on Franchising blogsite. Fish Consulting is a national PR and marketing agency that specializes in helping mature and emerging franchise companies achieve their business goals. We appreciate working with them in presenting this article to the franchisEssentials readers.
Is Commercial Real Estate in Bubble Trouble?
As posted on Fish on Franchising (Friday May 15, 2009)
Several years following the collapse of the housing market, which gave way to record breaking home sale and price declines, experts are now warning that the next real estate wave to hit the markets will be the commercial sector.
Until recently, commercial real estate was a bright spot in an otherwise dreary economy. While residential investment plummeted 28.9 percent from the start of 2006 through the end of 2007, investment in nonresidential structures grew 24.9 percent over this period. At the same time that residential investment subtracted almost a full percentage point of gross domestic product growth in 2007, investment in nonresidential structures was adding 0.4 percentage point back. And while the delinquencies on residential mortgages have been on the rise since the first quarter of 2006, delinquencies on commercial mortgage bonds reached a record low of just 0.27 percent this January, according to Fitch Ratings.
The problem is that commercial real estate tends to traditionally lag behind residential just a bit. With 5.7 million jobs lost since the recession began in 2007, nearly 13.7 million Americans out of work and the foreclosure rate double what it was the year before; it’s easy to see why commercial construction is losing its appeal. A depression in residential growth means fewer malls, shopping plazas, offices and other commercial centers that support new homes and economic good times.
There are already signs out there to suggest that the commercial market may have already turned sour. On April 16, the nation’s second-largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S. In addition, there are many reasons out there to suggest that commercial construction was plagued by some of the loose lending practices that eventually unraveled the residential market.
How bad will it get? Well that depends on how fast the economic recovery takes hold. More than likely we’ll see commercial failures start to pile up slowly until they tumble down in an avalanche of bankruptcies and debt like the residential market did. Problem is that if a commercial mortgage wave hits the banks soon, it is likely to prolong our nation’s economic recovery for quite some time. Additional bank losses at a time when they are already depressed by home mortgage and credit card defaults will probably mean more government intervention and taxpayer assistance. Only time will tell.