E-M8 Entrepreneurial Management for Eternal Mission

Over the last couple days there cropped up a few articles about the potential meltdown of commercial real estate market. I have good reasons to believe that those fears are exaggerated. To be sure, I do expect a surge in foreclosures, albeit a much lower one, since hard economic times will force weaker businesses out of business.  On the other hand, I do not expect to see the economic system devastated by those foreclosures nearly as much as what we experienced with the collapse of the residential bubble.

My reasons are following:

1. There is little evidence of a bubble in commercial real estate. It is much more complicated than residencial, so it is unlikely to attract short term speculators.
2. Unlike households, many of the businesses are worth a lot more when their doors are open than when they are out of business, so there is a built in incentive to invest in, or buy out the businesses that are failing because of the current market but have a solid operating model otherwise.
3. Typically, it takes 20-50% down for commercial real estate acquisition, which makes it highly improbable that somebody is significantly under-capitalized. This is the other reason for no bubble.
4. Commercial real estate, unlike residential real estate, is very specific to a particular business type and has a lot more limited lifespan (how many commercial buildings do you know that are over 30-50 years old), this means that there is a demand for new construction, which instead of creating a glut that drove the prices down in the residential, is necessary just to replenish availability of space.
5. The architecture and rules of constraction have changed much more drastically in the commercial world, thus acting as an absolesense factor.
6. Since the possibility for profit is there, people are much more eager to buy up failing real estate.

So, while some businesses will fail, the overall impact on the economy is likely to be neglegible. This does not mean we will not see a dramatic drop in commercial construction for a while.

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