Posted by: georgetownappraiser on: November 28, 2008
In the event that the US economy does enter into a period of sustained weakness, commercial property vacancies would likely rise, which would have a depressing effect on rents. Should this adverse scenario be realized, real estate capitalization rates could rise and values could fall, and investment in real estate investment would most likely drop off. Rising interest rates towards the later part of the outlook period is a factor that may reduce supply of new non-residential building space. Lower additions would tend to, all other things being equal, have the effect of driving down vacancy rates over the longer term. Nevertheless, in the meantime, geared lessors will face higher borrowing costs and falling values (i.e., as required yields will eventually rise). Risks would be magnified in the event that the economy slows appreciably.
Factors that will have a gradual (but adverse) affect on office tenant demand over the longer term include: growth in working from home; office sharing; and reductions in office space per employee. In a period of slower economic growth (when business confidence tend to be low), firms are more likely to closely examine their office space requirements. Large corporations, such as banks and business service firms, are engaging facilities managers to increase efficiency in the use of their owned and leased property portfolios. There has also been a transfer of back office functions, including call center, processing and software development activities, to low labor-cost countries (such as India). Growth in direct ordering (i.e., telephone, mail and Internet shopping) will have an adverse effect on demand for retail tenancies (for example by video rental stores). The Internet and broadband will also provide opportunities for productivity gains in the office sector.
There will be greater opportunities for working from home, which could negatively affect demand for office space. E-commerce is expected to improve supply chain management and reduce inventory requirements, and this may act to reduce some warehousing space needs, although Internet shopping has special warehousing needs. The grocery store environment is changing constantly and increased competition from super-centers such as WalMart and industry consolidation could result in grocery stores closings. There is a growing awareness among tenants of the costs and risks associated with property leasing. In some market segments, there is growing demand for shorter leases, and more tenants are engaging advisers when negotiating leases. Over the outlook period, tenants will seek more flexible arrangements from lessors and, if the tenants are successful, this would increase property owners’ risks.
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Jacquelyn Donner
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