So to answer definitively the “What should I do now?” investment question previously posed, I say it's time to hold with the caveat—sell anything sketchy or past its prime. I don't think it's a great time to buy and the always narrow development window is closing.
Well-located core properties in the leading 24-hour markets are too richly priced, but they are well leased and will throw off very solid income returns with values buoyed by consistently strong buyer interest. Recent jobs and GDP numbers suggest tenant demand could at least marginally strengthen, supporting modest rent growth. For owners, this is a sweet spot— you can sit back and collect your monthly revenue stream, while the time is right to lock in some long-term leases.
If you sell any of these prime properties, where are you going to find a better investment? All you are doing is making money for the brokers, investment bankers and lawyers, who have been egging you on so they can get a cut of the transaction booty, and then some if they can get you to buy something else on the rebound.
Now, fueled by a resurgence in U.S. energy production, the investment herd has been moving into the Texas markets—particularly Houston, Dallas, and Austin. This momentum play in traditionally hot growth, low barrier-to-entry cities can work for developers in certain parts of the cycle—like the last couple of years. But the recent drop in world oil prices should raise a cautionary note. Energy dependent markets are extremely volatile and captive of global geopolitics—just ask Mr. Putin and Venezuelan strongman Nicolas Maduro. The OPEC countries, led by Saudi Arabia, are quite happy to turn the screws on Iran as well as U.S. frackers by maintaining their production levels and letting prices dip further in the face of declining demand from European and Asian economies. In effect, they are taking direct aim at the Texas real estate markets and challenging near-term growth scenarios. At the same time, scientists are raising alarms even higher about the scary consequences of climate change and greenhouse gas caused global warming.
Merchant builders in the Lone Star state have been cashing in by selling recent development projects to institutional money, counting on the carbon energy play to continue. Their recent good fortune now spurs a second and third round of projects funded by opportunity funds and more confident lenders. History shows that these investments will pale against the early cycle projects and some may get caught in the next cyclical down draft.
Technology-driven property markets also get lopsided investor attention—at times like these we forget that San Francisco, Silicon Valley and other tech hot spots historically have proven highly volatile. They appear already priced to perfection. At some point soon, you would expect to see the inevitable winnowing of some high flying app makers (Uber is valued above Delta Airlines--hunh?)--as digital giants like Google, Amazon, Facebook and Netflix battle over each other's turf.
It's time to put the wallet away, solidify the good assets in your portfolio, and collect some nice income. Put another way, don't get greedy.
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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.
