“The old gray mare just ain’t what she to be” was a song my dad use to sing when I was a little boy. Later in the verse was the line “she ain’t what she use to be twenty some years ago.” As a kid I never really thought much about the song because my dad always broke out singing one silly song or another while working around the house. Dad was a child of the great depression and World War II veteran. He passed away some years ago so I can’t ask him what the song meant to him. However, now that I’m a lot older and grayer I’m beginning to get a sense of what it means to me personally. I’m certainly not the same person I was twenty years ago. Back than I worked out in the gym daily lifting heavy weights to build massive muscle so I could compete in body building competitions. Today I still work out every day but lift lighter weights with the vision of staying healthy and living a long life.
The real estate business isn’t what it use to be twenty some years ago either. Back than commercial property could be purchased at 10 – 12 CAPS and lenders, while conservative, were willing to make loans. In some cases they even partnered with the developer in the project. There were waiting lists to rent apartments and both retail and office vacancies filled quickly. Investors were readily available to help fund projects with capital. The real estate market was strong.
Today by contrast, I see commercial property selling at 6 – 7 CAPS and lenders, way too conservative, who are afraid to make a loan. The federal government has put rules in place that make it impossible for the lender to partner in a project. Apartments have high vacancy requiring property owners to reduce security deposits and give away months of rent as an inducement to rent units. Retail and office vacancies sit for months and in some cases more than a year to fill. Investors are less willing to provide capital for individual projects choosing to invest in REITs instead. The real estate market is weak.
Unlike me, where I changed my focus and adapted to my gradual aging, the real estate market pressed on thinking it could continue to do business as usual. The commercial real estate industry had the false impression that nothing has changed. It reminds me of the old guys walking around with a bad “comb over” who refuse to believe they are getting older and going bald. The only person they are fooling is themselves.
Okay, so the real estate business isn’t what it used to be. So what should we do now? Property owners need to adapt to the changing market. Realize that there will be less need for retail and office space as more business is conducted over the Internet. Reinvigorate older properties by positioning them as other uses and in some cases demolishing them and developing newer concepts that are in demand. It will also require the government to become part of the solution rather than part of the problem. Create an even playing filed for brick & mortar businesses by requiring sales tax on Internet purchases. Removing taxes that discourage capital investment in real estate and loosen the tight grip it currently has on the banking industry.
The old gray mare just ain’t what it sue to be but it certainly isn’t ready to be put out to pasture just yet.