"We are all old enough to have been through several cycles," explained Steven Wolgin, managing director of US Real Estate Advisors Inc. "And I don't necessarily believe this cycle will be short," adding that the conditions are different market to market.
Even though the cycle has to bottom out eventually, that point could be far off, the panelists agree. "I don't think we are anywhere near the bottom," said Robert Sheridan, principal of Robert Sheridan & Partners, which deals exclusively in the for-sale and multifamily residential market. "Today is basically a non-market because there is a great gap between the bid and the ask." There will have to be a significant price correction for the market to equal out, he added. "This is the worst I ever lived through and the worst is yet to come."
One element of this cycle is that there are still issues that have not surfaced yet, explained Keith Rosenthal, co-founder and president of Phoenix Realty Group. "I don't know what it is going to be but there other shoe has yet to drop."
In the meantime all industry eyes are on the next player. "Until there is a level of certainty across all the players that the bottom has been reached on valuations, no one is going to make the next move," said Sanford Herrick, managing director of Hudson Realty Capital.
But this cycle is different than the one the industry experienced in the 1990s. "In the '90s you didn't have the type of institutional industry you have today," Rosenthal explained, citing the growth of REITs. "Then there was a lot of money in private hands so when the buyer left the market there was no liquidity sitting on the sidelines. Today there is."
In the '90s, he added, just about every market and every product type suffered from an oversupply. Today, with the exception of the single-family housing market and its effects on retail, the balance of the markets is relatively healthy.
In the '90s revenues were down, expenses were up and cap rates were down, Wolgin added. "Fast forward to today and we have a 1% default rate for commercial real estate and tenants are still in place," he said, pointing out there are some weak spots to avoid.
To survive this cycle and to begin pulling itself together, the industry needs to go back to basics, Rosenthal said. "There is a point where the yield is just too good," he said. "There is a lot of money on the sideline looking to come back."
While the bottom is still murky, the panel does see 2009 as a better year. "I think there continues to be less transactional value in '08 and hopefully in '09 transactional buying begins to pick up," Rosenthal said.Herrick agrees to a point, saying activity could tick up in the second half of this year. "I generally see '08 as being slow with a little bit of activity in the third quarter and a lot of activity in the fourth quarter."
One lesson the industry did learn from the '90s, he added, is "the top of the market is never as good as it seems and the bottom is never as bad."
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