Half the year over and it’s time to take stock of 2011 so far… If you talk to the industry elites—deals are happening, the CMBS market revives, development starts up again, even occupancies and rents increase too. And then, you realize they are talking about two markets and one property sector.
All the office action centers in New York and Washington DC—cap rates decline towards 2007 record lows and new projects get underway (these are the only two markets where capital feels remotely safe). And a few mega projects ramp up in both cities, while the long awaited Freedom Tower in lower Manhattan starts to show a skyline profile.
Everywhere else—which means most of the rest of the country—is still off most investor radar screens, because the market fundamentals in most places are pretty anemic. Silicon Valley helps out the San Francisco region. Seattle is at least sideways. Premier Chicago product trades. Pittsburgh (yes Pittsburgh) gets some deserved attention (as predicted last Fall right here) because of its relatively successful transition from smokestack to eds and meds center. But let’s not get carried away—these markets mostly have the blahs when you’d be expecting more of a rebound coming three years after markets began to bottom. And even in NYC where some people might have you believe it feels like 2005, you read about Wall Street firms preparing to do layoffs and consolidate more operations.
The golden property sector, of course, is multifamily. No news here. Since nobody can afford to buy a house despite near record low interest rates (we have to make down payments now, don’t you know) apartments are hot, hot, hot. And we need more units in many markets to meet the demand—developers find lenders ready to deal.
Hotels show some signs of life, but mostly in the gateway markets. New York again is gangbusters—foreign tourists love the weak dollar. In San Francisco many of the top lodging properties are up for sale—which tells you something. Owners think it’s time to get out while the going is good. Retail hasn’t been the huge disaster everyone expected, but unless you own a fortress mall, a power center near a fortress mall, or a neighborhood shopping center in a good infill area, you can’t feel very comfortable. The consumer doesn’t look like he’s coming back any time soon what with chronically high unemployment and high gas prices (is that a bit of a panic move opening up the oil reserves?) eating into precious incomes. Their benefits under the budget axe, all those public employees out there (22 million of them) begin counting their retirement savings and figure it might be wise to save a little more—welcome to the private sector reality. As for industrials, the pros say warehouses are already overpriced—too much institutional capital chasing for core deals.
Some recovery—if you didn’t buy in 2009 and early 2010 you may have missed the market. Government stimulus, which kept us afloat for a while, ends in partisan wrangling over the debt limit. The Fed signals interest rates will finally move back up after giving up on its quantitative easing strategies. How’s that going to impact cap rates? They have nowhere else to go but up unless fundamentals improve dramatically, and if you get my drift, don’t expect that to happen. Hundreds of billions of dollars in properties still require refinancing over the next three years and CMBS underwriting standards reportedly already show a lack of reality.
Come to think of it, it feels more like 2007 or maybe more accurately 1937.
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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.
