Tepid. Anemic. Lethargic. Slower than we’d like.
That was the commercial real estate market story for 2011, and it looks like more of the same for the New Year as well as the foreseeable future. Vacancy rates will get better, but remain uncomfortably above equilibrium. Rents won’t increase substantially, and deal making will be relatively subdued even in the top markets. From a risk perspective, this shaky forecast also will remain particularly vulnerable to bolts out of the blue—now wouldn’t it be great if the Straits of Hormuz were blocked? And can anybody feel confident about what’s going on in Europe? The tap dance continues there.
And look at what developers are doing. Have you ever seen so many commercial developers eye apartment projects? It’s understandable since fundamentals remain so weak for new office and retail product. But if that’s not a signal about the cautionary prospects in the commercial markets, especially the suburban ones, I don’t know what is.
And what about apartments? Construction activity gears up in most places. Condo developers continue to shift units into rentals, there are all of those empty houses on the market without buyers who can afford them, and a slew of foreclosures waiting in the wings. Demand for rentals shouldn’t subside any time soon especially if more Generation Ys ever get jobs and move out of their parent’s homes. But when you combine the shadow condo-housing space with the ramped up new construction, you’ve got to figure eventually the multifamily market will soften—maybe just at the point when more people get back into the home buying market. Now that won’t happen this year or next. We’re probably three or four years out. But never say never even in a sector with such good current prospects. And how much higher can apartment landlords try to push up rents when tenants aren’t exactly seeing their paychecks register big gains? With developers rushing in from other sectors and cap rates at discomfiting low levels, don’t think the apartment sector is immune from future issues.
Have you also noticed that immigration rates have begun to decline? That’s not surprising either given anti-immigration politics and the lackluster jobs environment. The U.S. currently isn’t exactly the magnet of opportunity it has been. Of course, new arrivals stoke the apartment markets too. If their numbers stay down that could impact multifamily demand.
So the office turned multifamily developer strategy is pretty straightforward. Build now—these projects can go up quickly and markets won’t get oversupplied immediately. As soon as you’re leased up, sell to the typical institutional investor who is always looking for apartments to add into portfolios. And by the time the apartment markets have softened up, maybe it will be time to go to work on office again. Maybe. At least, there’s a chance to stay in business in the meantime.
It’s another sign that the real estate industry still has overcapacity—too many developers, too many investors, too much product and just not enough demand. The one healthy sector—apartments—now becomes prone to a wave of over indulgence. But then again why not do unto multifamily as you have done unto housing, office, and retail?
Let’s all hope for a good year ahead in any case.
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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.
