Part 3: Market Indicators vs. Selling Price
Commercial real estate owners and lenders are facing losses due to excess supply, high unemployment and declining market values. Defaults have soared, vacancy rates are approaching 20% and values could drop 50%+ from their height in 2007. One of the problems is that lenders were so lax in making loans and now that market values are depressed, there is no equity to refinance. Based on the current vacancy rate it could take 4 years before excess supply is absorbed.
The business jet market is faced with a similar predicament. Based on the number of medium and long-range business jets (from the LR60 to the G550) currently on the market vs. actual sales, the absorption rate ranges from 9 months to well over 5 years, assuming no more aircraft come on the market.
The markets have as much to do with fear and the unknown as they do with economic fundamentals. Recovery is still elusive and will occur only when unemployment rates drop and profits return. A direct correlation exists between the unemployment rate and office vacancies. When the unemployment rate subsides, the absorption rate for office space [and business jet sales] follow suit. Just as office space can be leased today at bargain basement prices, so can prospective buyers acquire aircraft at prices they were unable to in prior years, which in effect creates opportunities to buy.
Over the last 15 years, a direct correlation has existed between the DJIA and selling prices of business jets. However, values will only follow market indicators for so long until finally reaching economic obsolescence. One may ask, with office vacancy rates approaching 20%, why has the REIT Index, which measures the performance of the Real Estate Investment Trust, doubled from March to December of this year? Speculation can serve some markets well. However, considering that our industry is only 50 years young, the fact is we have limited history to substantiate projected Market Price.
Click on graph for larger view.
A combination of speculation and banks willing to loan above value creates an exuberance in which many dismiss valuation models. A 1990 GIV that sold new for $21M resold 18 years later for close to $20M. Buyers and lenders lost site of how economic fundamentals affect our market. Aircraft are depreciating assets, or more to the point, a piece of metal with an expiration date stamped on them. Whether the market is exuberant or depressed, Market Value always resides between Baseline Value and Market Price. With regard to the future business jet market, the new economy should result in more realistic values and pricing and owners and lenders alike would be well served to employ this rational approach.