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 06.18.2010 J. Paul Beitler: Signs of hope and cautionary notes |
J. Paul Beitler: Signs of hope and cautionary notes
Posted By Dan Rafter
http://www.rejournals.com/2010/06/15/j-paul-beitler-signs-of-hope-and-cautionary-notes/
J. Paul Beitler is one of the bigger names in commercial real estate. He’s president of Chicago-based Beitler Real Estate Corporation. During the last three decades, Beitler and his companies have negotiated more than 7,000 leases, managed more than 30 million square feet of space in 16 states and developed 10 million square feet of buildings. He recently spoke with Midwest Real Estate News about the recovering commercial real estate market and what might knock this recovery off course.
Midwest Real Estate News: We’ve been looking for signs of hope in the commercial real estate market for some time now. Do you have any for us?
J. Paul Beitler: There are certain weather vanes that we look for in commercial real estate to give us some idea if there are improvements in the market. Number one, is demand. We can’t create demand. We respond to it. To the degree that we see an increase in demand for commercial space, be it retail, office or industrial, then we know that the bottom of the cycle has been reached and we are starting to see a recovery. Secondly, is the availability of capital for construction loans for new projects. This is a very important weather vane for us. Capital is the sole ingredient that allows new property development to take place other than, of course, demand. We are starting to see commercial banks open to discussing providing construction loans for new projects.
Thirdly, we look to the vacancy rate within existing properties. When that rate stabilizes and starts to show positive absorption, however small, then we know that there is a possibility of stabilization. If that trend continues for six months, meaning that for six months vacancy stabilizes or decreases, that is a fair indication to us that stabilization is occurring.
MWREN: What are you seeing in these three indicators now?
Beitler: Right now, all three of these important economic indicators are showing positive signs. We are seeing an increase in demand, the availability of capital and the stabilization of vacancy rates, at least in Class-A buildings. However, there is a cautionary note: At the end of this year, the tax cuts that were initiated during the Bush administration will terminate. Currently, there has been no indication from the Obama administration that those tax cuts will be terminated, thus causing an increase in taxes, or if they will be extended for a period of time. Until there is a public announcement as to the current administration’s policy pertaining to those tax cuts, the stabilization process will continue but at a very guarded, slow pace. If the administration announces the extension of those tax cuts, that will be the first solid definitive move on the part of this administration that will bring stabilization to the business community so that they will have a definitive period of time to know what their tax obligations will be. That will result in accelerating what we view to be the current slow recovery.
MWREN: So you do see hope out there?
Beitler: There is always hope regardless of how dark the future may look. But hope alone can’t be a business strategy or a political administration’s platform. There has to be a definitive plan to provide political and economic stability that can be measured and can be depended upon for a protracted period of time.
MWREN: In your opinion, do you think the Obama administration will extend the tax cuts?
Beitler: It’s not looking good. Currently there are more people employed across the nation in governmental jobs than in the private sector. That has to stop. It is a regressive form of recovery.
MWREN: We do hear a lot about positive signs, whether in the economy in general or in commercial real estate. But these days don’t really feel like a recovery. Why is that?
Beitler: The recovery hasn’t been sustained long enough to establish credibility. We have created a consumer-based society. Our economy depends upon the individual consumer having expendable income beyond the bare necessity of home, clothing, food and a car. If there was excess on consumer side during the good years, it was due to the lack of checks and balances on the credit system. We now have imposed some substantial checks and balances that will prevent credit abuse. Now we need a period of stabilization so that the consumer can do two things: First, consumers need to begin to save money. And second, they have to take a portion of their earnings and purchase consumer products.
MWREN: Is our economy one that won’t work if consumers are frugal?
Beitler: Our economy doesn’t work if consumers are frugal. You either have trickle-down consumerism or trickle-up poverty.
MWREN: Has the Midwest fared better during the recession and the slow recovery than have other markets?
Beitler: I think that’s a myth. Traditionally, the Midwest recovers six months behind the West and East coasts in real estate. By the same terms, when there is a decline in either coast, the Midwest lags that decline by about six months. Further, the rents as well as the costs to build in the Midwest tend to be 20 to 30 percent lower than on the coasts, the West and East coasts. It’s not unusual to see a rent increase for office space in New York City that is greater than the base rent owners can achieve in their buildings in Chicago. What does make the Midwest desirable from an investment standpoint is that you do not have volatile swings in rents and values. It tends to be a more stable investment. It’s more predictable. That’s why the investment community likes to add a portion of their portfolio from the Midwest. It acts as a stabilizer.
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