As the real estate cycle dips in the midst of the credit crunch, expect investors to pull back from secondary and tertiary markets and continue to focus on the handful of global gateways. Values will hold up better in New York, Washington, D.C., San Francisco, West LA, and Seattle where capital has been concentrating. These markets boast diversified tenant bases with international reach.
When the economy slows, hot growth markets -- Atlanta, Dallas, Phoenix, Denver -- tend to cool off more quickly, getting caught with oversupply as demand shrinks. The OC and much of Florida, meanwhile, feel the side-effects of slumping housing and condo markets. Midwest manufacturing centers appear most vulnerable -- already hurting in good times, most capital red lines these markets in bad.
Capital will also gravitate to infill properties, especially apartments and neighborhood shopping centers, and shy away from development especially in fringe areas. Institutional money continues to seek distribution/warehouses near major ports and dominant international airports. Suburban office and limited service hotels look more dicey. The further away from vibrant metro centers, the less interest from buyers and lenders.
Money players will also start to avoid smaller office markets with few major tenants and limited employer diversification. They worry that a major headshot -- like a city's dominant company forced into large layoffs -- would upend market equilibrium and cause property net operating incomes to plummet. But state capitals find some cushion from ample government jobs... at least for now. We need to watch whether states and cities tighten their belts in the next year as tax revenues decline.
In short, market bifurcation starts to occur in a flight to quality. The receding capital wave now forces greater upward cap rate adjustments on weaker properties in weaker markets. Investors who paid a higher price per pound in Manhattan or downtown Washington rest easier than owners in the Jersey suburbs or Northern Virginia. Capital starts to think about the meaning of risk adjusted returns again.
© Miller Ryan LLC 2008
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
