Improved California Housing Market Setting the Pace for Commercial Real Estate

A booming housing market can help bring up the commercial market as well. Image from Wikimedia Commons

Trying to give a simple explanation for the 2008 recession is a fool’s errand, at best. It was incredibly complicated with multiple causes and many people to blame. For the general public, however, it seemed to start with housing. The market collapse and slow-motion foreclosure catastrophe of 2007 presaged the terrifying breakdown of 2008. The recession affected everything, including commercial real estate, as a shaky economy convinced many to stay put.

So it is fitting, perhaps, that a rebounding California housing market bodes well for commercial real estate. It is a healthy canary in the coal mine, so to speak. Businesses, non-profits, churches, and other organizations will potentially find that their real estate portfolio has improved and that they have more flexibility. A look at the housing market, and the connection between the two markets, can explain why.

The California Housing Market Comeback

Most news stories in 2007 focused on Las Vegas – the casino metaphor was too good for reporters to pass up – but California bore the brunt of the housing crisis. Many called it the “Ground Zero of the foreclosure epidemic.” As recently as 2012, there were reports that California wasn’t out of the water yet and that, despite the harvest of the improving economy, we were not yet saved.

That’s begun to turn around. Throughout the United States, including California, the housing market is showing signs of a dramatic rebirth. New housing sales were up 28% in February, with existing home sales up nearly 5%, despite February being a brutally cold month for much of the country. Even better, first-time buyers started to return to the market. This is especially important. Owners who had equity could afford to buy and sell, to an extent, making first-time buyers entering the market a really strong indicator of economic improvement.

Additionally, despite the improving economy, inflation remains low, keeping rates at a very manageable level. This is good news for buyers and for sellers, who have a less limited market. With low inflation rates and a strong economy, people have more money in their pockets.

Focusing in on California, the message is a little more mixed, but considering where we were coming from, it is still great news. Underwater borrowers are down nearly 30% on a year-to-year basis, which means more people have a chance to refinance or to reenter the market. That might be the biggest number holding back real estate – once more people are in the black, they can start spending again, improving the value of housing and getting more people out of the black. It is not wise to declare we have reached a tipping point, but we aren’t falling backward, either.

Implications for Commercial Real Estate

To be clear, there isn’t a through-line between a rise in residential real estate and a rise in commercial. There are too many factors in both that preclude such X-to-Y analysis. However, it is true that the housing market is generally a bellwether for a more bullish economy. Experts are divided regarding whether or not this is a bubble, but the consensus seems to be that a bubble is avoidable. We could be entering a period of sustained – and, more importantly, sustainable – growth.

If this is the case, many properties can go up. A strong economy, particularly in real estate, means that your holdings may be worth more, whether you are a business, religious institution, school, or non-profit. More work means more building, more moving, and more need for real estate. You could be in a great position to sell and to buy.

If you are, it is important to work with a broker who understands both traditional and nontraditional real estate needs. The market is still uncertain. Partnering with someone who knows your concerns and who has your best interests at heart is the best way to navigate these times.

If you are in the market for commercial real estate, you don’t have to go it alone. You can get a thorough analysis of the market with all the available options from a consultant whose community values align with your own. Contact DCG Real Estate today to learn more.