Mike Bond is a senior lecturer in finance at the Eller College of Management, having previously taught at Cleveland State University. He earned his PhD in Financial Economics in 1985. His current research focuses on real estate finance, investments, healthcare finance and insurance, and venture capital. We asked him to tap his wealth of experience in commercial real estate to answer some questions about the current state of the industry and what its future looks like.
Q: Could you start by telling us a little bit about your background and why you chose a career in commercial real estate?
I am a PhD financial economist who has taught, researched and consulted in a host of finance areas including residential and commercial real estate.
Q: Considering the COVID-19 outbreak, what are your thoughts on the CRE market in the US today in terms of trends and challenges?
The big problem, of course, is the fact that some businesses can’t pay their rents. In that case, building owners can’t pay their operating expenses and mortgages, which in turn causes losses for bank and nonbank lenders. The quicker we’re able to reopen, the better.
Q: What differentiates the commercial real estate market in Arizona from other major markets in the United States?
Arizona has a net inflow of people over time which means we need more houses, apartments and residential buildings. Of course, the people who are not retired work at companies that operate with commercial real estate. All new residents need groceries, medical services and so forth, so demand for CRE is generated.
Q: How have you seen the industry evolve in the past years you’ve been involved in it?
There are several things. Brick and mortar retail has declined, being replaced by warehouse operations and online retailers. Lots of real estate finance is now done through securitization where Wall Street packages mortgages into various types of bonds for investors. It’s also much easier to access real estate data and info with the internet.
Q: Where do you see it going in the future?
Population is moving South and West, so that bodes well for Arizona. Obviously in the South-West U.S., water will be an increasingly big issue in the future. I do think we continue to make home buying too easy, with low down payments and high payment-to-income ratios. this increases the possibility of another housing crisis in 10-15 years. Currently, though, with very low mortgage rates, real estate is a pretty good investment.
Q: Are there any lessons from the past few years that you would impart as an absolute must for those looking to get into the CRE industry?
CRE is not an especially efficient market. Properties can stay over- and undervalued for years. You need great discipline to properly time these things. Also, in down markets, it’s difficult to get financing so available access to cash is crucial.
Q: What is your general assessment for the commercial real estate market in 2020? Have you spotted some interesting market trends, especially considering the current pandemic?
Cap rates (net rents divided by building value) range nationwide from 5.4% for apartments to 9% for hotels. With very low mortgage rates, CRE is looking like a good investment, assuming a quick economic bounce back.
Q: How has the evolution of online marketing impacted the commercial real estate industry?
As mentioned above, the online environment makes info readily and quickly available.
Q: Any other insights that you’d like to share?
Real estate is an asset you can lever. If you buy stocks and they go up by 10%, you make 10%. If you buy a building and put 20% down you make a lot more than 10%.