In an interview today (June 26), Sumers and Thomas J. Saylak, also a senior managing director, provided GlobeSt.com with their take on the current slippage. Both executives agreed that what we're experiencing is, in fact, more a correction than a slump.
"In almost every market, the industry has experienced softer demand and declining rents, depending on when the owner bought the building," Sumers commented, "but, for example, $83 per sf in the South of Market district of San Francisco was not sustainable."
Nevertheless, the investment advisors are realistic in terms of how long the current correction will last, and they challenge the belief that the real estate recovery will be in full swing by Q3. "There will be an uptick in activity in the fourth quarter," Saylak predicted, "but it won't be what people are expecting."
The general rule, they explained, is that the industry lags behind the general economy by roughly six months. "With the exception of hotels," Sumers added. "Those are essentially one-night leases. We'll see that sector pick up faster."
While the real estate community awaits the uptick, it must deal with the joblessness and the vacant desks it leaves behind, very often in what Sumers calls "phantom space. "A company may lay off 300 people, but that might be spread over a number of floors or buildings. That space won't be subleased and will have to be occupied again with new employees before the tenant is likely to seek additional space."
As a result, Saylak added, soft periods demand a redefinition of the target properties funds go after. "We look to buy assets that generate high current cash-on-cash returns where we are less reliant on capital appreciation to achieve our total return objectives," he said. "The suburban office and apartment sectors do not fall into that category, while the healthcare and hotel sectors may. Those are just some of the pockets of opportunity we're finding."
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John Salustri
John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.
