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Housing slump Featured

8:00pm EDT September 1, 2008
If any industry has felt the troubled waves of the current U.S. economic state as much as the construction industry, it’s real estate. Nary has a day gone by without talk of foreclosures, mortgage crises and the like. But what about the people on the front lines here in Northeast Ohio? Are things really bleak or just setting up for better days ahead? Smart Business and Skoda Minotti teamed up to survey 51 real estate professionals on the current state of the industry. After reviewing the real estate survey results, we’ve compiled the following highlights. 

The local beat

The overwhelming theme of the survey responses focused on the current state of the Northeast Ohio economy. With the low demand for housing, the real estate market has been severely impacted.

The economic troubles caused by the residential real estate market in this region have been well documented. Our respondents do not believe that the situation is going to improve in the near future. Forty-nine percent of our respondents believe that the residential market will offer the least opportunity for growth over the next five years.

Others mentioned the retail industry specifically as one of the more troublesome segments of the economy: “Slowing retail sales will slow retailer growth, especially in Northeast Ohio,” and there has also been a loss of “the retail tenant pool.”

Many of the survey respondents conveyed the negative impact that the economy has had on their businesses. One respondent stated, “Consumer confidence is the greatest challenge. Companies are hearing all the bad and not taking advantage of opportunities in front of them.”

The slow economy has resulted in increased competition for companies in the real estate industry. Much like the results of our construction survey, this increased competition has led to lower property values and ultimately lower profits.

At least one respondent, an adviser to the industry, does believe that there is a light at the end of the tunnel despite the slow economy: “I see businesses growing and have assisted many by educating them on the economic incentives available as well as the benefits of the Economic Stimulus Act of 2008.”

The credit crunch

In today’s lending climate there has been a heightening of lending restrictions. The majority of our survey respondents (65 percent) were seeing equity demands of 21 to 30 percent, a number higher than what most would have expected in the past.

Additionally, 90 percent of our respondents felt that banks are asking for more liquidity of the borrower than in the past, and 78 percent felt that banks were asking more in terms of a secondary source of repayment from the borrower than in the past. These increased equity and liquidity demands are resulting in a significant slowdown in both deal flow and closings.

Our real estate industry survey respondents also felt that their buyers have been affected by the “credit crunch.” One respondent stated, “It is a fight for every sale. And, then you still have to worry about the buyers obtaining financing even if they have good credit and income.”

Many feel that we may have reached the low point of the real estate market. Only 20 percent of our respondents feel that they will have fewer opportunities in Northeast Ohio in the next three years, while 55 percent feel that they will have more opportunities in the local market.

One respondents’ advice is that owners need to think outside of the box in order to be successful in this market: “The real estate industry is changing and landowners need to make the change with the economy. Biofuels and biomedical are just a couple areas that are seeing an emergence in this market, and governmental programs are assisting in this new use of the real estate market.”

Not all of the respondents felt as though the market will recover so quickly. One respondent stated, “Since the population of our region has begun shrinking, it has become increasingly difficult to meet the absorption necessary to profitably develop property for most uses. A reduced number of end users are available to place orders for new homes and tenant spaces as the volume of used, for sale or lease property swells. Add in tighter underwriting and negative public opinion and the impact on new construction and development has shut down many long-standing builder/developers here. Subsequently, durable goods sales are off significantly. As the industries supplying these sectors slow down, employment drops off and we find ourselves in a regional recession. Unfortunately, the demand drivers needed to pull us out of this are going to be difficult to generate, so I expect to see this slump continue for quite some time.”

ROBERT A. RANALLO, CPA/ABV, JD, CVA, is a partner at Skoda Minotti and is the advisory partner to the Real Estate and Construction Group. Reach him at 440-449-6800 or bobranallo@skodaminotti.com

Special thanks to the professionals at Frantz Ward LLP, Parkview Federal and Associated Builders and Contractors Inc. for their assistance developing these surveys. Real estate survey results based on 51 companies.