On the Mark: We need to let the commercial real estate market take care of itself

MARK STRAIN

The more we progress, the more that progress seems to become weighed down by government involvement in our lives. Regulation now defines a civilized nation rather than individual freedom, creativity, and competition that at one time were the building blocks of a free and prosperous country. Instead we have turned the idea upside down by assuming it is potentially unfair to those who are not able to compete to be surpassed by those who excel. In essence by protecting the folks who have not been successful we stifle the abilities of those who are.

This latest recession is a disaster for numerous people. Both professionally and personally, many lost their entire net worth, their homes and their careers. The infamous market conditions that we once relied upon simply vanished leaving a lot of folks and businesses totally unprepared. When money was flowing freely, government intervened and set up standards and practices to extract some value for every gain realized by successful business and individuals.

Instead of just taxation, all kinds of user fees were proposed and accepted by business. New regulations were created to impact market conditions wherever government felt it was needed. Anytime business is flourishing the imposition of new fees and creative regulation is less controversial and more easily instituted then in more desperate times.

Affordable housing regulation was an agenda that thrived under a booming economy. Not necessarily by creating more housing through market controlled pricing, but in the ability of government to successfully intervene in the regulation of how affordable housing occurs, where it occurs and providing programs to buyers of such housing.

Even though the business community steadfastly said the market would take care of itself, government knew better. The market was strong, the timing right and the politicians proceeded to put programs in place to make everyone a homeowner, regardless of whether or not they understood and could manage the responsibilities.

The rest is history.

Unfortunately many of those regulations are still in place and continue to intervene with the free market. In a reverse scenario to that of the affordable housing approach, the commercial market has similar regulatory forces working to control it locally.

It seems we have empty commercial space in the urban area everywhere right now, a true glut on the market. Much of it will remain that way so long as the prices remain unacceptable. It’s that way in many cases because land was purchased, developed and built at the peak of the boom market, when owners paid the highest prices and thus need to charge higher prices for lease space. Until those owners are forced to restructure their debt or are able to ride it out until prices go back up, their spaces may not be competitive compared to someone who can either restructure or build new somewhere else at far less costs.

In reverse to the affordable housing regulation that was designed to create more; when it comes to building more commercial space in new zoning districts, our regulations are designed to create less when the market is overly supplied in order to protect what is existing until more is a proven need.

The idea behind this is that allowing less expensive space in the market too soon might encourage more abandonment of existing commercial areas. Someone building more commercial space today on cheaper land with less building costs could charge considerably less per square foot for lease space.

However, lower lease rates mean more businesses may be able to start up, hire more employees and provide services and product at rates reflecting their reduced overheads. By forcing the delay of price competitive commercial space, new business startups will be delayed, hiring will be delayed and prices will remain higher until costs are allowed to fall. Eventually as the less expensive space is consumed and the financial carry works on the existing space, rates will balance.

The market took care of itself in the affordable housing arena, just as it will in the commercial market. We need to let it happen.

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