Commercial Real Estate Surprisingly Strong in Mid-Atlantic

by: Ockham Research August 20, 2009 | BXP / FRT

"If you look at the real estate investment trusts, or REITs, they've been soaring. Real estate gets the worse articles, yet Boston Properties (BXP) is up 38% since March 30. Federal Realty (FRT), up 44% since March 30 and up 12% since the company's great CEO Don Wood came on the show and said the worse was over. That's why you've seen REITs move so aggressively (not just shoring up the balance sheet), but they are starting programs to take advantage of opportunities in the future. There are areas that are actually strong - New Jersey, Delaware, up 36% quarter-to-quarter.. These are not the kind of numbers I expect to see when I read scary articles about commercial real estate getting much worse." - CNBC's 8/19/2009

The conventional wisdom holds that commercial real estate is likely the next shoe to drop. Looking at macroeconomic trends such as unemployment and widespread corporate cost cutting, it seems to make a lot of sense. Combine those macroeconomic factors with the fact that many markets were aggressively overbuilt during the boom times, and it would seem a recipe for lower occupancy rates and lower rent payments. In a relatively short time, this could put pressure on banks that have lent large amounts to construction and development and CRE financing, and when the banks suffer the entire economy feels the pinch.

That line of thinking has been widely disseminated through financial media over the past few months. However, somebody forgot to let the commercial REITs in on this conventional wisdom because they have been soaring. The media has scared away a lot of risk averse investors to REITs recently, but those that have stuck it out are starting to see things turn around according to industry insiders. Some of the weaker REITs will still fail under their heavy debt load, but the strongest in the group will benefit from the competition dropping off.