USC: Commercial real estate may face tough year ahead

LOS ANGELES
December 4, 2007 11:16am

The residential real estate industry could drag the commercial property sector into a downturn in 2008, and real estate investors, developers and service companies need to start preparing now for what could be a tougher business environment, says Stan Ross, chairman of the University of Southern California Lusk Center for Real Estate.

“No one knows what will happen to the economy, the credit markets, or oil prices next year,” says Mr. Ross. “But real estate companies shouldn’t wait to see if a storm will hit, or how intense it will be. “They need to start their contingency planning today.”

He says companies can begin by assessing the current health of their organizations and then consider how to maintain the stability of their companies in 2009 under different risk scenarios such as the economy sliding into a recession or property markets weakening further.

Mr. Ross suggests that companies conduct ongoing market assessments and evaluate the impact of market changes on an organization’s health.

“By having a clear understanding of their organizations -- projects, cash flows, costs, liquidity and financing -- and the external economic, business, and property market environment, developers and investors will be better prepared for whatever happens in 2008,” he says.

In any event, Mr. Ross recommends early communication with lenders as these strategic decisions are being considered.

“The point is, companies need to take the initiative and not let themselves be overtaken by events,” says Mr. Ross.