If any industry has felt the troubled waves of the current U.S.
economic state as much as the construction industry, it’s real
estate. Nary has a day gone by without talk of foreclosures, mortgage crises and the like. But what about the people on the front
lines here in Northeast Ohio? Are things really bleak or just setting up for better days ahead? Smart Business and Skoda Minotti
teamed up to survey 51 real estate professionals on the current
state of the industry. After reviewing the real estate survey
results, we’ve compiled the following highlights.
The local beat
The overwhelming theme of the survey responses focused on the
current state of the Northeast Ohio economy. With the low
demand for housing, the real estate market has been severely
impacted.
The economic troubles caused by the residential real estate market in this region have been well documented. Our respondents do
not believe that the situation is going to improve in the near future.
Forty-nine percent of our respondents believe that the residential
market will offer the least opportunity for growth over the next
five years.
Others mentioned the retail industry specifically as one of the
more troublesome segments of the economy: “Slowing retail sales
will slow retailer growth, especially in Northeast Ohio,” and there
has also been a loss of “the retail tenant pool.”
Many of the survey respondents conveyed the negative impact
that the economy has had on their businesses. One respondent
stated, “Consumer confidence is the greatest challenge.
Companies are hearing all the bad and not taking advantage of
opportunities in front of them.”
The slow economy has resulted in increased competition for
companies in the real estate industry. Much like the results of our
construction survey, this increased competition has led to lower
property values and ultimately lower profits.
At least one respondent, an adviser to the industry, does believe
that there is a light at the end of the tunnel despite the slow economy: “I see businesses growing and have assisted many by educating them on the economic incentives available as well as the
benefits of the Economic Stimulus Act of 2008.”
The credit crunch
In today’s lending climate there has been a heightening of lending restrictions. The majority of our survey respondents (65 percent) were seeing equity demands of 21 to 30 percent, a number
higher than what most would have expected in the past.
Additionally, 90 percent of our respondents felt that banks are
asking for more liquidity of the borrower than in the past, and 78
percent felt that banks were asking more in terms of a secondary
source of repayment from the borrower than in the past. These
increased equity and liquidity demands are resulting in a significant slowdown in both deal flow and closings.
Our real estate industry survey respondents also felt that their
buyers have been affected by the “credit crunch.” One respondent
stated, “It is a fight for every sale. And, then you still have to worry
about the buyers obtaining financing even if they have good credit and income.”
Many feel that we may have reached the low point of the real
estate market. Only 20 percent of our respondents feel that they
will have fewer opportunities in Northeast Ohio in the next three
years, while 55 percent feel that they will have more opportunities
in the local market.
One respondents’ advice is that owners need to think outside of the
box in order to be successful in this market: “The real estate industry
is changing and landowners need to make the change with the economy. Biofuels and biomedical are just a couple areas that are seeing
an emergence in this market, and governmental programs are assisting in this new use of the real estate market.”
Not all of the respondents felt as though the market will recover so
quickly. One respondent stated, “Since the population of our region
has begun shrinking, it has become increasingly difficult to meet the
absorption necessary to profitably develop property for most uses. A
reduced number of end users are available to place orders for new
homes and tenant spaces as the volume of used, for sale or lease
property swells. Add in tighter underwriting and negative public
opinion and the impact on new construction and development has
shut down many long-standing builder/developers here.
Subsequently, durable goods sales are off significantly. As the industries supplying these sectors slow down, employment drops off and
we find ourselves in a regional recession. Unfortunately, the demand
drivers needed to pull us out of this are going to be difficult to generate, so I expect to see this slump continue for quite some time.”
ROBERT A. RANALLO, CPA/ABV, JD, CVA, is a partner at Skoda Minotti and is the advisory partner to the Real Estate and Construction Group. Reach him at 440-449-6800 or [email protected].
Special thanks to the
professionals at Frantz Ward LLP, Parkview Federal and
Associated Builders and Contractors Inc. for their assistance
developing these surveys. Real estate survey results based on 51
companies.
