Below is a letter I sent to the Birmingham Business Journal to accompany their Annual Commercial Real Estate Deal of the Year Award:
“My nomination for the Commercial Real Estate deal of the year? The one that didn’t happen. This year has reconfirmed that old axiom that occasionally the best deal you did is the one you didn’t do.
I can think of a number of announcements I read nine months ago for new class A office buildings, retail centers, and industrial projects that were to break ground this year, only to be shelved for now. These projects may not have happened due to lackluster lease-up, difficulty in arranging financing, higher than expected construction costs, or just a negative “gut feel” by the developer. How smart do they look now? I can assure you that those developers and their lenders are thanking their lucky stars that they didn’t break ground.
Taking it a step further, the owners of the existing supply of buildings here in Birmingham are also thankful there isn’t more competition coming online. And that’s one of the great things about Birmingham, we’re not a boom/bust town like our larger sister cities. Our developments have been built by mostly home-grown folks who have a good feel for what our market will bear. We don’t seem to attract as many out of town developers and therefore have less volatility.
You’ll read a bunch over the next year about the coming Commercial Real Estate bust that will follow the residential melt down. While I can see how many of the Commercial Mortgage Backed Security Loans were aggressively underwritten over the past few of years, I don’t think we have an excess supply problem. To put it another way, in past CRE downturns, developers sewed the seeds of their own demise by overbuilding. This time is different as supply and demand were in equilibrium for the most part when we entered the recession. It will be interesting to see how this plays out.
It is my belief that if you were a smart shopper during the past 5 years, you didn’t overpay based on rosy rental assumptions and you didn’t over-borrow, you should be fine. Conversely, if you bought a deal that only works if rents grow, you are going to feel some pain when your loan renews. It all goes back to being conservative, planning for the worst and hoping for the best.So congratulations to all the winners listed in this edition and an honorable mention to those of you who had deals that you didn’t do!
Derek Waltchack is a principal at Shannon l Waltchack Investment Real Estate, a local company that aquires, develops and manages commercial real estate. He can be reached at email@example.com.