Monday, January 26, 2009

“It’s Always Sunny in Philadelphia”

(All quotes in bold courtesy of Benjamin Franklin, the penultimate Philadelphian)

Is it always sunny in Philadelphia? More like cloudy. One thing is for sure in Philadelphia, however; it’s never too hot or cold. While winter winds make gloveless hands subject to frostbite in under five minutes this time of year, many have speculated that the commercial real estate market is every bit as cold. While that may be true on a more macroeconomic and national scale, the local marketplace sings a different song. Over the next three posts, we will take a quick look at the macro economy, the economy local to the Philadelphia MSA, and then on the third day provide a verdict for what it means to investors.


The most negative macro outlook we’ve heard is that markets won’t fully rebound until 2012 when some other creative Wall Street vehicle is created to facilitate the flow of capital back into the marketplace. The most optimistic view? That while the beginning to 2009 will be rough, this recession more closely mirrors that of the post “dot-bomb” era of earlier this decade than that of the S & L crisis of the late eighties, rampant inflation of the late seventies, or dare we suggest as other pundits have (gasp!) the Great Depression.

He that can have patience can have what he will.

Inflation numbers, while they may be misleading, are still in the single digits. Interest rates are still at historical lows. Yes, the stock market has dropped close to 40 percent from August 2008, but the sky is not falling. Local banks are still lending. Yet many real estate investors, at least those who can afford to, have been sitting on the sidelines for the last 6 months and have no immediate plans to switch gears. While there is an abundance of capital being raised in various vulture funds in an effort to take advantage of distressed properties and the debt that saddles them, nobody seems to know if, or exactly when, we will reach the bottom.

Diligence is the mother of good luck.

While the bid-ask spread between buyers and sellers has gradually narrowed over the last few months, there still remains a considerable gap between the two. Yes, sellers are finally starting to adjust their pricing expectations due to rising operating and financing costs. Buyers’ underwriting standards are as stringent as ever, and rarely will you see contingencies waived during due diligence without loan commitments being firmly in place. Yet while many sellers still remain enamored with 1Q 2007 prices, buyers are firmly entrenched in reality.

Stay tuned on Wednesday when we take a look at what's going on at a Micro level in Philadelphia....

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