The New Reality of Commercial Real Estate

As the credit crunch continues and the bears are driving the DOW, finding bright spots in retail development are hard to come-by. Lenders are adhering to and are extremely sensitive to basic lending principles in their loan packages and even the best of mortgagee-mortgagor relationships are straining under the weight the market.

Declining real estate values have put all commercial developers in an untenable position much like the residential market. Upside down loans are becoming common-place with lenders unwilling or unable to renegotiate terms. While all developers cannot be saved from foreclosure proceedings there are opportunities to fill vacant space if you are willing to go back to fundamentals.

In any down economic cycle, a renewed sense of self-preservation is borne. Consumer's re-trench and begin looking for places and items where they find value. Retailers (and developers) who create places and experiences that match those values are able to not only survive, but prosper.

We've all used terms like "One man's junk is another man's treasure" or "A bad day for stocks is a great day for bond holders".

In the current economic climate, developers should be looking to fill vacancies or jumpstart projects with retailers who match the local and/or regional demographics and core psychological needs.

There are several truth's when people are unemployed or facing financial constraints. Nearly all return to providing their families with basic needs. These needs are clearly defined as food staples, such as bread, milk, and pasta's. Entertainment staples such as movies, concerts and comedy (which are often cheap or free). Transportation to include unnecessary trips and more efficient vehicles.

Developers should also be looking to a "go back to basics" approach by building smaller more efficient projects and/or filling space with tenants who match these paradigm shifts in attitude. Retailers such as Wal-Mart (discount big box), Publix (Grocery), Regal Cinema's or Comedy/nightclub venues as well as McDonald's or comfort-style type restaurants all fill these voids.

Creating or revitalizing a strip or power center around these staples will not only attract consumers in this economic climate but position properties for the mid to long-term impact of sustainable growth.

Consumers will always have the basic psychological needs of being entertained, saving money and finding perceived value in items during economically stressful times. While this approach may not seem sexy or cutting edge, it is developers and property owners best chance for survival.

In the years ahead, property owners must be prepared for a renewed urbanism that will include inflation, higher unemployment (or underemployment), and lending terms that will not be as favorable than what we've experienced in the recent past. Owner/Investor's can exploit the current credit climate by building smaller, less expensive centers using the business principle of quantity saturation to build profits. Further, with new technologies and the ability create operational efficiencies by proximity, property owners will be able to maximize NOI.

Owner's who realize that yesterday's excesses are no longer fashionable and who are willing to define the future landscape of commercial property types will be seen as pioneers in the industry and position their companies for the future.