Bill Pastuszek, Shepherd Associates

We have all been supercargo on this “Uncertain Optimism SuperTanker” for a while. We are willing to steam along but we’re not quite sure if it’s time to slow down, stop, or turn: which way, to port or starboard? SuperTankers take a while to respond to signals. That is the big problem with them.

That’s the trouble with real estate markets too. They often are hard to move in any other direction than that in which they are headed. And when it’s clear it’s not in the right direction, it’s sometimes too late.

The commercial real estate (CRE) markets seem to be showing signs of, well, stabilizing (we like that word, whatever it means), maturing, resetting themselves, or, perish the thought, entering a phase otherwise known as a correction. No, not yet for the latter.

Things wouldn’t actually go down again, will they? They did that in 2009; we’re too smart for that to happen, aren’t we? The pundits say investors and lenders are too smart for that to happen. Memories are short, and, there’s a new generation out there ready to learn the lesson again.

The somewhat anemic national economic recovery which began when the government reported that the recession ended in 2009 has been clanking along for 7 years now. (Never was quite convinced that the recession ended in 2009, but somebody had to say something in those bad times.)

There are a number of secondary, large scale factors that in sum may have a braking effect on the CRE markets. These include a volatile stock market, global economic instability, major terrorist-related economic threats, and surging foreign investment in U.S. real estate, both commercial and residential. All of these factors have conspired to make for this protracted pressure on real estate markets.

On the good side, interest rates are likely to remain manageable. Low energy prices are good for operating budgets.

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.

Consider that investors are bottom fishing in many cases, moving into tertiary markets and worse to find those “value-add” deals. Not so many of those are out there unless you are willing to play the high risk game. In many of these non-prime markets, investors seem to settle for high risk but low returns. That is a recipe for disaster if the market burps; no cushion in those deals for a temporary or permanent bump.

Anecdotal evidence suggests that many equity investors and lenders are laying back. The smart ones are happy with their take this time around. Let the rookies take over at this point.

A major investor survey seems to think that it might be time to pull it back. The survey indicates that enthusiasm seems to have throttled down since end of 2015. The sense is that pricing is at or near peak levels for most assets and in most major metropolitan area markets. The destabilizing influence of aggressive foreign investment is not presaging a major downturn, but signals caution as we have learned that too much money chasing too few assets will breed what might look like a bubble, especially in core markets.

Investors worry about the future. With tenants becoming more cautious of getting locked in long-term, and slow rent growth taking place and with cap rate compression ending, investors may be thinking that there isn’t much else to be extracted.

The most recent version of the Fed’s Beige Book notes the following for Boston: In Boston, leasing activity is steady and fundamentals remain strong; however, tenants are exercising greater caution in their space demands when renewing leases. In Boston’s commercial real estate investment sales market, the number of buyers willing to pay record-high prices continues to decline and lenders appear less enthusiastic about underwriting such bids. The report for other cities in the First District is less optimistic.

Residential real estate continues to remain strong, according to the Beige Book. The report notes that Realtors are “desperate” for listings in most markets. Another source brings forth statistics that show pricing in some high end markets topping out. Shall we revisit in 6 months?

Far from being a dark scenario, this is a time for investors and those who analyze investment behavior to step back and look carefully at assumptions about the future. This is a time when the past may not be a very good guide to the future and a fresh outlook may be needed. The tanker doesn’t turn on a dime but looking out toward the horizon and heeding the small signals may be the best thing market analysts can be doing right now.

Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.