Commercial Real Estate Fears Are Overinflated

By Ryan Snefsky

Commercial real estate has been on the radar of fear for many people for quite some time now. The basic investment thesis is that with unemployment high and many Americans continuing to lose their jobs, the demand for commercial office space will likely continue downward. Additionally, with consumer spending relatively low compared to historical standards, an argument can be made that the demand for retail space will continue to go down as well. While at first glance these theories seem to have some merit, I strongly disagree with the notion that commercial real estate as a whole will be the "next shoe to fall."

The concern has always been that the commercial real estate players would get crushed because they would not be able to continue to afford making payments on the debts they use to finance the purchase of their properties. But, the primary reason I don't believe that commercial real estate will get completely crushed is simply because it's been so widely predicted. The smart players have had months to see this coming and they’ve been able to adjust their strategies accordingly.

The primary way the big players have adjusted their strategies has been to raise additional capital. In the case of the big publicly traded real estate investment trusts (REITs), a great way to accomplish this is to conduct a secondary stock offering. This ultimately increases the number of shares outstanding for these trusts and effectively devalues the existing shares. However, this action also raises money that can be used to pay down existing debt or even purchase additional properties being sold by commercial property owners that didn't adjust their strategies or simply were not able to raise additional equity.

The ability of major real estate players to raise capital has been quite impressive, despite the recent market conditions. Publicly traded Kimco (Symbol: KIM) raised approximately $300 million in December 2009 after raising approximately $624 million in April of the same year. Publicly traded Simon Property Group (Symbol:SPG) was able to offer an additional 23 million shares of stock for $50 per share in May of 2009 after raising approximately $543 million in March of the same year. Stories of REITs raising equity for the last year or so have been plentiful.

Will there be some casualties in the commercial real estate market? Absolutely. There have already been a good number of failures. But with many of these failures, there are smart and highly capitalized companies that are stepping in to clean up the bargains. As long as the big players remain hungry for more deals at reasonable prices and the economy continues to show signs of improvement, I just don't think we're going to see the level of devastation we saw with the residential real estate market.