View From The Top: Industry Leaders Speak Out

When I asked agents at our corporate convention this year how business was, they all said, "Great." But I sensed they were guarded in their answers. They did not seem to be fearful of any particular housing threat but of potential forces that could undermine this "boomlet" market.

How could business not be great? The National Association of Realtors has reported that not only did the number of home sales rise to record heights in 2001 but that sales of existing single-family homes in January 2002 leaped to a new annualized monthly high of more than 6 million. Add to those unprecedented sales volumes an upturn in manufacturing, a rebounding stock market, and Federal Reserve Chairman Alan Greenspan's March 7 announcement to Congress that the nation's economic recovery has started.

But in spite of housing's strength and positive economic indicators, commercial real estate is one economic sector that could adversely affect residential sales.

Construction in a High-Tech Area

I'll use Denver as an example of high-tech markets that could be affected. This story could be repeated in Boston, Seattle, Austin, San Jose, and other areas.

Out-of-state visitors driving down the Interstate 25 corridor south of the Mile High City must be struck by the number of construction cranes, the rising office buildings, condominiums and townhomes. All the construction activity suggests that the local economy must really be booming - just like the U.S. housing industry.

But as the old song goes, it ain't necessarily so. Mortgage Bankers Association figures for the fourth quarter of 2001 indicated that both delinquencies and foreclosures in Colorado were the highest they have been since the recession of 1992. And as The Denver Post reported in early March, the Colorado unemployment rate rose to 5.7 percent in January - the first time in a decade that Colorado's jobless rate exceeded the national rate.

Now "free rent" offers are beginning to appear on space leasing signs, both residential and commercial. Also, a high-end apartment complex that was planned years ago initially advertised units starting at more than $2,000 per month. The building owner has cut rents nearly in half for the grand opening.

So, if the state's economy is hurting, why all the commercial construction around Denver? The question could be asked of commercial construction around other highly corporate centers across the country.

Commercial Construction and the Dot-com Crash

Two years ago in Realty Times, Lesley Hensell's "Is Industrial/Office Space Reaching Overkill?" looked ahead to current commercial trends. Hensell cited a Society of Industrial and Office Realtors report that, she said, "clearly stands as a warning to those further developing new office space in an already slowing marketplace."

That was even months before the dot-com fallout began. That collapse led to layoffs, plummeting stock values, and bankruptcies, but had little effect upon commercial building already in the works.

A commercial project is like a locomotive pulling a hundred cars loaded with coal. It takes a long time and an awful lot of power for the train to get moving, but once it does, it takes just as long and just as much force to slow it down.

The loans for buildings that are now nearing completion were probably planned three to four years ago, when hopes for expanding office space and employee housing was high. The dot-com meltdown has left behind a commercial supply in excess of demand.

The technology and telecommunications crash was reflected in individual financial failures. According to ABI World, the number of nonbusiness bankruptcy filings nationwide rose to nearly 1.5 million in 2001. And the Mortgage Bankers Association of America warns that delinquencies and foreclosures could continue to rise in 2002.

Know Your Marketplace

While residential real estate continues to thrive, commercial overbuilding could have a negative impact on the housing market. Evaluate your market by looking around at the commercial projects that were begun before the tech collapse. Is there enough demand for office space and complementary housing in your area to sustain the new construction? If not, you might expect competing properties to appreciate at a slower rate than they have in recent years. Also, you need to be aware that when you list and sell residential properties, you may be competing against free rent in overbuilt residential complexes.

At the same time, commercial overbuilding affords commercial and residential agents opportunities to represent building owners in leasing of office space and sales of condominiums.

Knowing what's going on in residential, commercial and other areas that influence the housing picture will enable you to better counsel your former and potential customers.

Daryl Jesperson (ABR, CRB, CRP) is president of RE/MAX International, Inc., a real estate franchise network of tens of thousands of associates in thousands of offices worldwide. RE/MAX International is headquartered in Greenwood Village, Colo., 303-770-5531.

Published: April 2, 2002

Use of this article without permission is a violation of federal copyright laws.