Commercial real estate to avoid
Three Shrinking Cities to Avoid in the USA
During times of economic turmoil, the phenomenon of shrinking cities often emerges. Shrinking cities are most commonly characterized by significant reductions in population, deteriorating infrastructure and high rates of unemployment. This type of environment is toxic to local businesses, and it often makes companies and property investors reluctant to inject new capital into any type of local commercial real estate. The most recent economic downturn has plagued some cities more than others, wreaking havoc on their real estate markets and causing commercial property values to plummet. The following cities have felt the pain of shrinkage the most, and currently need to be avoided as far as commercial real estate investment is concerned.¬†
Only a few decades ago, Detroit boasted a population of 1.8 million people and the highest per capita income in the United States. Years of disappearing manufacturing jobs, widely-documented corruption in local government, and compounding municipal debt has turned the once-great Motor City into a veritable wasteland of only 700,000 inhabitants. The city’s recent Chapter 9 bankruptcy filing has done nothing to improve its image, either. Commercial real estate investment has been sparse due not only to a collapse in Detroit’s qualified work force, but also due to its crumbling infrastructure; as just one example, a full 40 percent of Detroit’s street lights do not even work. Detroit’s high crime rate also has investors concerned; with the murder rate being at a 40-year high and burglary and vandalism rates soaring as well, the issue of basic physical safety is enough to keep most commercial real estate investors at bay. Although eventually Detroit’s situation may bottom out and turn around, its current condition is still decidedly on the downswing.¬†
The nation’s capital has long been considered to be a “recession-proof” area for commercial real estate investing, but the most recent economic crisis has caused many to reconsider the validity of that idea. With recent cutbacks in government spending and public distaste for expanding government becoming more pronounced, the future for government expansion in the area is looking rather dim. This produces a ripple effect in terms of attracting government contractors to the area, which in turn puts downward pressure on the demand for commercial properties. The crime rate in Washington, DC is one of the highest in America, being rated as 95% more dangerous than all of the other cities in the US. This statistic, coupled with DC’s stubbornly high 8.5% unemployment rate, can serve as a deterrent for new investment as well. Population growth has also slowed significantly from its peak in 2010. Overall commercial investment volume for the Washington, DC area has dropped by 33 percent; not a very welcoming statistic for prospective investors either.
Las Vegas, NV
Las Vegas remains one of the focal points of the recent economic meltdown. Sin City has lost well over 70,000 residents since 2010, and industrial vacancy rates are at a sky-high 17 percent. Much of this empty space is due to the rampant speculative commercial development that took place in the years leading up to the 2008 Financial Crisis. Credit troubles have plagued many small and large businesses, forcing a number of them to permanently shut their doors. In addition to this, high vacancy rates have kept rents at low levels. Add to this the difficulty of selling commercial property during the current credit crunch, and you have a recipe for anemic commercial real estate investment.¬†
While no city should be permanently written off, there are several social and economic factors that must be addressed before these shrinking cities will see a rebound. The road to recovery may be long, but every local commercial real estate market experiences times of cyclical growth and contraction. Staying aware of these issues will assist you in making sound investment decisions, and will ultimately save you both time and money.