In this series, I’ll focus on things that look pretty basic, but I need your help.
One of the most overused phrases in residential housing commentary is
as in…
…but the fundamentals are strong… or the equivalent. Here’s an example of its use:
>According to the most recent report from the Houston Association of Realtors, sales in July 2007 actually INCREASED from July 2006. With a “credit crunch” or liquidity crisis in the mortgage market, Houston’s strong underlying fundamentals are likely the cause.
>Spreads on commercial mortgage-backed securities have widened with the turmoil in the wider debt markets and the cost of commercial mortgages has risen, even as real estate fundamentals are improving.
But here’s a clue (vacancies and rents):
>Commercial-real-estate fundamentals such as vacancies and rents are solid. But lending practices in the commercial sector became aggressive in 2005, 2006 and the first few months of this year, which could lead to more serious problems.
and lately its been more of a commercial real estate phrase than a residential:
>the difference between now and 1991 “is that the economy is strong and the real estate fundamentals are great.
Its a phrase that seems to sooth all concerns because those “fundamentals” are pretty basic (er…sorry).
But what are they? And can we all agree?
Wages, employment, economic growth….
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Real estate fundamentals in the early 90’s didn’t include a computer. Today a computer is a must.
in commercial RE (simplistic)
Location – d’oh
Demand for product – low vacancy better
Product in pipeline – no new building better, unless you’re a developer/operator who needs the fees from the suckers (oops, investors)
Unit rates ($/sf) – rising better, or at least stable
Macro factor – Inflation (high kills those 15 yr deals, unless you got a COLA in the lease)
Utilities – reliable better (cf. NYC in 1970s, with both Con Ed and NY Tel having serious problems)
Long term prospect for locality – i.e., don’t buy land in the Bangladesh delta area (which may happen to Wall Street, according to the yellow pamplet I just got from the city re hurricane preparedness – a little global warming will go a long way with the Manhattan shoreline)
Just a start….