Perception Becomes Reality: This Real Estate Cycle Is Different

No matter where I am during the holiday season — at business functions or personal gatherings — the conversation inevitably turns to the state of the real estate market. Most people have only a limited base of knowledge on the subject because it is not their primary area of expertise. As a result, when they hear or read stories about real estate, they tend to lump commercial and residential real estate into the same category and assume it is all performing poorly.

Those of us in commercial real estate are extremely frustrated by this lack of distinction in the media. All of the “noise” surrounding the residential market — and particularly the sub-prime sector — has led many outside the industry to assume commercial real estate is doing terribly as well. That simply is not the case.

The biggest problem in residential real estate is that many investors entered the market after the tech bubble burst and began treating real estate the way they had treated stocks — buying properties, flipping them for quick profits, and rushing to the next deal. As we know, that strategy rarely works long term — not in the stock market and certainly not in real estate.

Perpetuated by the Media

The difference between commercial and residential real estate has not been accurately portrayed in media coverage. A clear distinction is rarely made, and because many of the so-called “investors” were not trained real estate professionals, stories and assumptions tend to blur together.

I understand that media outlets must paint a broad picture so their stories

resonate with a wide audience. However, when the focus is overwhelmingly on residential challenges, and the audience is broad, misunderstandings are inevitable.

To test this theory, I began reading more stories about industries outside my expertise. I quickly realized how easy it is to be misled when you lack a strong foundational understanding. When I read reports about health care, insurance, or telecommunications — industries I am far less familiar with than commercial real estate — I found myself simply absorbing the information without questioning it.

So when the media heavily emphasizes the “horrible state of the residential real estate market,” readers who don’t understand the distinction naturally assume commercial real estate is in the same position.

What’s Really Going On

Commercial real estate is not experiencing the level of downward pressure on values that many assume based on residential headlines.

There may be specific subsets feeling pressure. For example, certain retail sectors in rapidly expanding areas of the Bay region were impacted when residential developments became saturated with investor purchases. In some cases, commercial developers relied on sales figures rather than true demographic data such as actual move-ins. That miscalculation can create ripple effects.

Additionally, there are small pockets of suburban office product that may have been modestly overbuilt. However, these situations are isolated and hardly representative of the broader commercial market.

We can’t blame readers or viewers for assuming commercial real estate is suffering in the same way as residential. It would be helpful if the two sectors were more clearly separated in media coverage, but there appears to be little incentive for that distinction to be emphasized.

The speed and volume at which information now travels only compound the issue. With rapid news cycles comes shorter public memory.

The result? Perception quickly becomes reality. And if given the choice between changing perception or changing reality, I would choose reality every time. Perception is extraordinarily difficult to alter because it lives in the mind of the beholder — not in objective fact.

Here in the Bay area, 2007 will likely be remembered as the year of the housing market “meltdown.” It would be unfortunate if it were also remembered as the year the commercial real estate market declined — not because of sound economic reasons, but because of a mistaken association.