WEDNESDAY, NOVEMBER 19, 2008
by Jenn DankoChicagoIndustry leaders convened at CoreNet Global's Chicago Chapter monthly luncheon on November 13 to reflect on the economic roller coaster ride of 2008. The panel discussion, led by Chicago's Grubb & Ellis Managing Director Shawn Mobley, hit the highs and lows of year that started with sub-prime speculation and ended with Wall Street devastation.
"It's hard to look at where we are at today without taking a look at the stock market," said Mobley, in his opening panel remarks. "There's been a dramatic drop in equity values that we have seen over the last course of three months."
Mobley explained that equity values have dropped from $21 billion from summer to 2007 to the current figure of $12 billion, according to Standard & Poor's 500. With demand for commercial real estate down, the numbers indicate that the market can expect to see another three to four quarters of negative growth, he said.
Adding to the bricks-and-mortar blow are an increasing amount of job losses, which, while shallow most of the year, continue to trend upwards. With the current unemployment rate standing around 6.5 percent-or 1.2 million cuts jobs this year-Grubb & Ellis is forecasting numbers that will eventually reach the 7.5 to 8 percent range, which translates into 1.5 to 2 million.
"The numbers say we're not half way there in terms of job losses," he said. "That will lead to a decrease in demand for commercial real estate pretty nicely."
Also adding to the economic brunt are $23 trillion in outstanding loans that Mobley says will lead to $1 trillion in losses, as it stands today. The deals getting done now were started in "a better time," he says.
"On the positive side, we've got $700 billion coming, which we're all hoping shows up in banks and in the lending markets soon," Mobley added. Lower interest rates and commodities prices down, also shined as economic bright spots to the current economic climate.
Keeping positive
Panel member Jack Durburg, executive managing director for CB Richard Ellis' Chicago Region, said focusing on the positive is crucial in a time when market talk is clearly negative.
"When you look at things, it's always through this capital markets lens, which tends to be really negative," he said. "But if you peel back a layer and look into a lot of businesses that we're in, there's a lot of activity that nobody's talking about."
Durburg said that for first three quarters of 2007, CBRE completed 1,350 lease transactions, as compared to 1,200 in the first three quarters of 2008, only a 12 percent decrease. He also noted that through first three quarters of '08 CBRE closed on 86 investment sales transactions and has 30 loan originations through the same time period.
"On the capital markets side, how could it be worse than 2008?" he asked an audience of roughly 200 attendees. "I am going into the year thinking we are going to get a bounce in the second half of 2009 from our capital markets business."
Other CoreNet panelists for the afternoon included: Richard Gatto, executive vice president, The Alter Group; Dan Ryan, managing director, Midwest operations, Jones Lang LaSalle; and Denis DeCamp, former director of global workplace services for Rockwell Automation, who also brought a positive spin to luncheon. A long time advocate of alternative workspaces, DeCamp said the decrease in demand for commercial real estate could force companies to reexamine and restructure ways of conducting daily operations.
"We now have companies coming to us and looking at alternative work spaces-a lot of them have been resistant for a long time," said DeCamp, also noting that outsourcing is becoming more of-interest to companies. "Now we have the opportunity to be much more creative than we ever have before; and with the help of our service providers, we'll find different ways of getting this information out there."
Realistic and diversified
Gatto looked at the situation from the realistic approach of working one's established assets, especially since there will be much less construction in the coming year. His company is also focusing on niche opportunities, such as student housing and health care, to get them through the slump.
"Real estate is an industry that moves like larva, you can see it coming," he said, giving attendees a reason to smile. "It's a lagging indicator of the economy."
Although lagging, Ryan said that the commercial real estate industry in a city like Chicago maybe better economically insulated from a recession, thanks to its diversification. He noted that the financial services sector only represents about 14 percent of central business district office, as compared to placed like Manhattan, where 30 to 35 percent of his businesses are in banking. He dismissed apprehension of an oversupply problem in Chicago's downtown, despite 5.1 million square feet of new construction coming in 2009 and 2010.
"With demand slowing, what we don't have is this huge supply problem that the market has seen in years past," Ryan said.
The four panelists and Mobley ended the hour-long discussion by framing the current market cycle as a learning opportunity for all of those involved in the industry, whether it's their first or 40th year.
"For the past seven or eight years-things have been pretty good," Gatto said. "It's a good time to think and understand the business because when it's been moving at the pace it's been going, you don't have time to stop and learn. You're too busy making money-now it's time to be more sponge-like."
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