“Are we there yet?” This could be the kids in the back seat or a way of asking if this long, long, long commercial real estate expansion is no longer. This end of days concept has been written about a lot over the past few years.
We know that real estate markets don’t turn easily. Or, it might be better to say, it is hard, except in retrospect, to see when they have turned. We have all been merrily riding along on a CRE supertanker, a concept that has appeared before in this column. Once pointed in a direction, it’s to get them to turn, stop, or slow down. The turn signals don’t help very much.
In the past, even when there is some consensus that things should slow down, the long wave of real estate transactions prevent an orderly shutdown. Deals may be in place that looked good six months ago and now don’t. However, a lot of resources get committed to the transaction and a point of no return is reached. Many of those involved in the transaction (up on the bridge) sense this funny rumbling feeling from below decks but don’t pay it much attention.
Commercial real estate (CRE) markets seem to be showing signs of stabilizing (you say, again? We’ve heard that before). And, stabilizing, a good word that might just mean something, just like another good work, “significant.” So, stabilizing can mean maturing, resetting, re-adjusting. Would “significantly stabilizing” mean entering a phase otherwise known as a correction? Perish the thought!
Where are the causes for concern? There are a number of secondary, large scale factors that in sum may be having a braking effect on CRE markets. These include a volatile stock market, global economic instability, rising interest rates, and national economic instability. Additionally, on the transaction side, the era of great deals is over, good deals are hard to find, and what’s left are a lot of risking, messy development deals, value-add projects, and 3rd and 4th level investments Overall transaction activity has continued to slide and cap rates have bottomed out. A colleague recently mentioned dollar store cap rates as a precursor of things to come. There are some signs that residential buyers in some markets are becoming more reluctant to buy.
The general sense, even among some of the unbridled optimists out there, is that this recovery is playing itself out. With it, CRE markets are showing signs of needing refreshment.
Investors worry about the future. The future is not that certain. Investors are worried about acquiring property and not having rent projections work out. There are many who may be thinking that there isn’t much else to be extracted out of this current cycle.
Things wouldn’t actually go down again, would they? Remember they did in 2009; we’re too smart for that to happen, aren’t we? Memories are short, and, there’s a new generation out there with no direct knowledge of the lessons learned then.
Far from predicting a doomsday scenario, this is a time to current investment behavior and look carefully at assumptions about the future. Back in the day, there was much talk about a soft landing: it actually ended up being a major one. The tanker won’t turn on a dime but we have to look out toward the horizon and heed the small signals that we see.
Bill Pastuszek, MAI, ASA, MRA heads Shepherd Associates LLC, Newton, Mass.