There was an interesting series of articles over the past week or so —
a “series” only because they all relate to commercial real estate in
Austin. I don’t comment often on the commercial world, but
these pieces seem almost designed to make an important point:
First, without comment, here are the articles:
Austin American-Statesman, 12/28/09: Commercial real estate foreclosures more than double in Austin area
Austin Business Journal, 01/04/10: Austin ranked best city to invest in commercial real estate
Austin American-Statesman, 01/05/10: Austin-area office market struggles
Austin Business Journal, 01/05/10: Hanger Orthopedics negotiates 75,000 square foot North Austin lease
The first piece (Commercial real estate foreclosures …) comments:
“George Roddy Sr., president of Foreclosure Listing Service, said he expects commercial foreclosures to remain at the current level — or perhaps higher — throughout 2010. He added that the numbers do not mean necessarily that the commercial property market is in a dire situation. ‘Residential foreclosure postings have been at the high-end of the foreclosure cycle for some time now, and the commercial market generally follows behind residential,’ he wrote in a statement.”
Next, consider the point of the second article (Austin ranked best …):
“Because commercial real estate lags the labor market, it still has a ways to go before reaching its own low point,” said Bob Bach, Grubb & Ellis senior vice president and chief economist. “The good news is that the freefall we saw in 2009 is over and the future is more certain, giving owners and users of real estate the confidence to begin making decisions again.”
Then the third article (Austin-area office market …):
And new demand for large commercial leases will affect property values in the future. That’s why the fourth article (Hanger Orthopedics …) is important. Hanger has not made a commitment, and no lease has been signed, but the fact that Hanger is having serious discussions is a vote of confidence in Austin and our ability to deliver a skilled workforce and an attractive place to live — the things that have allowed our local economy to thrive over the past 15 years or so. I have blogged frequently about other indications of Austin’s economic strength relative to most other U.S. metropolitan areas.
So … the short version:
- Market forces — in this case the “Great Recession” — cause economic stress, depressing employment and therefore demand for office and other commercial real estate;
- Savvy investors recognize that “buy low” is not just an adage. “Down” markets are when investors get into the market.
- The market cycle recovers, carrying increased employment and property values with it.
- Successful investors profit from their foresight and their willingness to bet on the future.
Among many lessons to be learned from the past couple of years is that the reward of investing must not be “de-coupled” from the risk. Creative mortgage-related investment instruments allowed originators of “sub-prime” mortgages to reduce or eliminate the risk of default by poorly qualified borrowers, so they kept making high-risk loans. In the process of stepping in with “bail-out” and “stimulus” spending, government has done it again, by telling some companies that they are “too big to fail.” In that world, executives have incentive to maximize profits without regard to risk because they know that somebody else will protect them from the downside. Without debating the wisdom of one fiscal policy versus another, it is clear that in both of these situations business executives were acting rationally based on their own views of market reality.
This is NOT an argument for regulating risk-taking behavior, except in ways that keep risk and reward known, visible, and closely coupled. Some investors will bet correctly. Some won’t. Where one investor falters, another sees opportunity. That’s the way the business world is supposed to work. We see it in action now in Austin, and I hope we’ll allow the local market to function naturally — win or lose. I believe we’ll win because I have confidence in Austin.