That’s easy. For the most part, the commercial and industrial markets lagged being the residential markets when entering into the price appreciation cycle, and they are lagging exiting it, too.
People were watching their homes double and triple in value and were wondering why their commercial properties weren’t doing the same. Over time, many of the commercial market segments have become just as overpriced relative to their rents as the residential markets as a result of those buyers letting their little head do all the thinking.
The difference between the two markets is that no matter what, a residential property does provide a basic necessity of shelter. Commercial properties are all about profitability, so ultimately these prices absolutely will adjust to reflect the realities of the rental markets.
There was a big article in the Union-Trib the other day about spec builders in the office markets. There was a reference to sale prices in the $500/SqFt range and in the same breath a comment about tenant opposition to rents in excess of $3.00/SqFt. If you run the numbers, after taking out the taxes and other expenses, a sales with those numbers wouldn’t even come close to debt servicing their mortgages even if they were completely occupied, which none of them are. These investors are apparently betting on continued increases in pricing and/or increases in rents; and there’s really no reason to think that either of those will occur. A company has options about where they need to be based, more so than a homeowner.
So yeah, some of these commercial buyers have become just as dumb about their commercial properties as they were with their homes. And yeah, some of these commercial markets are destined for the same types of price corrections.
