Getting rich with Commercial Real Estate (CRE) Pt IV? Better look for some friends in high places!

This is part IV in our continuing story around the Commercial Real Estate market. It seems that there is a way to get rich with CRE after all. You have to look for some friends in high places: at the central and local governments to be exact.

The Financieel Dagblad reports about the CRE market in the following article: Government builds  a record number of new offices itself, in spite of widespread vacancy (link in Dutch):

The government is a very important principal for the commercial real estate market. Last year the governmental demand for building permits was at a record height, while the problem of vacancy is growing. This is noticed by the Economic Bureau of the ING Bank in their Quarterly Report Commercial Real Estate.  

At this moment an estimated 14% of total office space in The Netherlands is vacant. From the issuance of building permits, it becomes clear that the government accounts for nearly 50% of all handed out building permits. In 2010 the number of building permits for government buildings soared to a record value of €301 mln.   

ING ascertains: By ordering the construction of these offices the government stimulates the non-residential building industry, but this development leads to a higher rate of vacancy in the existing CRE. The Dutch government tries already for quite some time to solve the problem of structural vacancy. The state organized several CRE summits with interested parties, but the main problem of newly started construction while there is still high vacancy under existing commercial buildings, is not tackled yet. However, it shows that the total number of supplied commercial building permits has declined. Last year a total number of €664 mln in commercial building permits was supplied, compared to €945 in 2009.

In Getting rich with Commercial Real Estate Pt III and various other articles, I wrote about the difficult future for the CRE market in The Netherlands. The main economic zones around Amsterdam, Rotterdam and The Hague suffer from a structural vacancy of 10 – 20% and a total vacancy of 15-25%. Partially this was caused by the credit crisis, but mainly it was an existing problem that was only amplified by the crisis.

The building industry is an important industry in number of employed people. This (structural) vacancy, however, means that every commercial building that is newly built stands for another building that is left behind vacantly. There is structurally the same or less demand for CRE than there is supply.

The Dutch central and local governments should know this and should, instead of ordering new buildings, invest in renovating and refurbishing existing office buildings. But this doesn’t happen. With their current behavior, the Dutch government makes itself largely responsible for the pauperization of Dutch cities, like Amsterdam and Rotterdam. The structural vacant buildings will be deteriorating and will eventually turn into unsafe places were the wrong people will hang out. Besides that it makes the cities more ugly, as most newly built office buildings have a disgusting architecture and are built using the cheapest materials.

The government should stop this building madness and should accept that jobs in the building industry will disappear eventually. The government should not build “bridges to nowhere” or in the Dutch situation, build offices for nobody!