Business Leader recently spoke with area real estate experts to get their take on the regional market. Their analysis of present and potential future trends in North Carolina’s real estate arena offers an inside look at the current market and what’s to come. Taking part in the discussion were: Jack Dunn, president of Craig Davis Properties; Mike Harrell, director of office division at Beacon Partners; John-Mark Mitchell, partner and principal at Yost, Little and Mitchell; Pat Riley, president and COO of Allen Tate Realtors; and Ashley Wilson, sales associate at Coldwell Banker Howard Perry and Walston.

Q: How would you describe the current state of the real estate industry?
Dunn: Turmoil. It is very difficult to find solid footing for any element of real estate. Asset values are in flux and dropping. The lending market changes daily. The broader economy is in a recession with job losses and weak consumer spending, making it very difficult to predict future demand in a number of asset classes. We are operating in the most fluid environment I’ve seen since entering the business in the early ’90s.

Harrell: The existing commercial market in our area is relatively healthy, considering the recent housing decline, credit crisis and overall economic environment.  Vacancy rates for office and industrial space remain below traditional averages but will likely increase over the next 12-18 months with the loss of financial jobs and the delivery of some large buildings that are currently under construction. That being said, there will not be many (if any) new speculative projects started in the near future due to the lack of available financing. Therefore, while there may be a short-term increase in vacancy rates over the next 12 months, the commercial market seems to be in a good position to weather the current economic storm.

Mitchell: The Triad housing market is something that is hard to describe. While there is a surplus of houses on the market, there are lots of buyers looking at the same time. The problem with the buyers is that their consumer confidence is at a lower level than market reality. Unfortunately for sellers, this is a buyer’s market. The triad has not witnessed this for years. It almost seems unnatural for people selling their houses to believe this.  Fortunately, however, the Triad is not even close to seeing the buyer’s market present in other areas and states. Our property values, along with the cost of living, still make the Triad extremely attractive to out-of-state buyers.

Riley: Residentially, in the markets we serve, new construction remains impacted by more stringent credit requirements. The resale markets suffer from an oversupply of properties caused by unrealistic sale prices and buyer hesitation.

Wilson: The current market in the Triangle is one of the top markets in the country. As brokers, we need to keep this in mind and remember that the sales process is a transfer of energy to our clients. If we are confident and positive about the market, our clients will be more inclined to invest in real estate. If we are uneasy and negative about the market, our clients will feel that as well!

Q: Are we currently in a buyer’s or seller’s market?
Dunn: We are in a buyer’s market, but you’ll see transaction volume way down over the next year as sellers attempt to hold through this period and sell in a market closer to equilibrium. Near term, lower leverage levels, more conservative underwriting and higher equity yields will continue to drive prices lower. We may see pension funds and large institutions forced to sell in 2009 to meet current cash needs or as the denominator effect forces real estate sales to offset losses in equities. Some less capitalized owners may be forced to sell as they are unable to extend or replace maturing debt.
 
Harrell: I think it will continue to become more of a buyer’s market over the next 12-18 months as the economy softens and it becomes increasingly difficult to finance new projects or refinance existing loans. The challenge today and for the foreseeable future is going to be the ability to get new deals done. The credit crisis has made it difficult to get financing for new development or acquisitions projects, and when you do find a well-positioned project that qualifies for financing, the cost of capital is significantly more expensive then it was 12-18 months ago.

Mitchell: We are currently in a buyer’s market for the most part, but there are certain areas that still sell for a higher price and can have multiple offers even in this market.  While this is rare, it still can happen due to the competition in that area and how well-priced the property is at the beginning of the marketing of the property. With new construction slowing down, this will soon help by having fewer properties competing for the same buyer.

Riley: This is the best time in history to buy, for both first- and second-home markets. Sellers must be realistic about setting and reducing their price point, keeping in mind that if they have equity, they’ll make it up on the buy side.

Wilson: As I tell my buyers, it is only a buyer’s market if you buy real estate!  

Q: How has the banking crisis affected the industry?
Dunn: The banking crisis is really a liquidity crisis. The issues span not only the banking system, but also the insurance industry, hedge funds and other specialty-structured finance organizations. Big picture: don’t forget that real estate performance is highly correlated to the broader economy, and over the last quarter the intensification of the liquidity crisis has further weakened a recessionary economy. Loans for new development without substantial presales or preleases will be very difficult to secure in 2009. You’ll probably see some consolidation as better capitalized developers and owners acquire weaker competitors. Commercial foreclosures probably peak in 2009, trailing residential foreclosures, which are probably at their peak as we speak.  

Harrell: It has caused CAP rates to increase, property values to go down and a number of new development projects to be postponed. The biggest concern going forward would be an overreaction to the credit crisis that results in the inability to get financing for well-qualified projects.

Mitchell: The banking crisis has affected the real estate industry by placing harder demands on qualifying the buyer. Ultimately this has stopped several ready, willing and able buyers from completing their transactions. This discourages some buyers from even applying for a loan. Again, consumer confidence is the problem that is constantly being fed by the media and hopefully is turning around with the bailout and other government interventions.

Riley: Residentially, for individuals with a job and credit, there is plenty of mortgage money available at great rates. The only real change is the availability of funds for those with marginal credit or lack of documentation.

Wilson: I think the media has had the largest effect on our industry. There is still money out there to borrow. Our positive lenders need to spread this word. Again, the market is what we make it.  If we want to let the banking crisis affect our attitudes about our market, it will! It might be a good thing that folks will now buy homes they can afford. We are back to the basics on lending programs, which is also a good thing.

Q: Is there an upside to this economic climate?
Dunn: If you can position yourself to acquire land or assets, valuations to the buyer should be very favorable. Deals will be hard to close, but the next year probably presents the best buying opportunity since the early ’90s. New development will slow materially, providing long-term benefits to holders of assets today.

Harrell: It is hard to see much upside in today’s climate, but the good news for the commercial market is that the oversupply of product is not going to be an issue like  it was in the early ’90s, which will help keep vacancy rates down. The other good news is that if you are well capitalized, underleveraged and have a long history of performance, I think there will be significant opportunities both in development and acquisition over the next 12-24 months.  

Mitchell: The upside to this economic climate is that there are some really great buys in this market. Ready buyers have the ability to purchase in a low market and get instant equity. The interest rates are super-low and make house payments very attractive. If you need to buy a house, there has not been a better time to get a great deal than now. This climate will not last forever, and the buyer can take advantage of the competitive prices.

Riley: For those who leverage the equity in their homes, they can win by acting now while others are sitting in the bleachers.

Wilson: The strong will survive and thrive in these economic times. Times like this make us better at what we do – again, back to the basics!

Q: What types of properties are most popular now?
Dunn: You hear a lot of institutional folks talk about apartments as more folks are unable to participate in home ownership and rent as a result. Industrial is generally viewed as a defensive asset class, but the Triangle isn’t a major distribution market. I think we will have one of the country’s better office markets, but we’ll still soften some as the economy sheds jobs.

Harrell: With a lot of folks unable or unwilling to buy a house today, rental and multifamily projects seems to be popular. Other popular properties include those that don’t include a lot of risk (built-to-suits, acquisitions that include long terms leases, etc.).

Mitchell: The properties that are most popular now are those that are being reduced or were competitively priced at the beginning of their marketing. The buyer is looking for the best deal in any particular neighborhood; if you are trying to sell, you need to be that house. Price is not the only thing that a buyer is looking for, and having a well-maintained, well-landscaped property is also an advantage in this market. Making your property unique and special will help any seller get the results they are looking for in this market.

Riley: Because of what has happened in the equities and retirement portfolios, people are buying more conservatively than they were a year ago.