by Gary H. London
The economy has turned, certainly statistically, and perhaps even emotionally. The unemployment rate has come down nationally (to 8.9%) and, while a good sign, portends years of recovery in front of us before unemployment levels again reach 5%. There are lots of other indicators demonstrating economic growth.
However, the question remains, is it “on the ground” yet? The answer would be “yes” if we saw an uptick in transaction activity or pricing. There is peculiar and significant activity in the trading of “core” properties—think better-than-Class A—particularly in major metropolitan areas such as New York City, Boston and Chicago. The trouble is that this has yet to translate into similar robustness in most of the other markets, and in lower-than-A assets including commercial properties and land.
A period of dynamic activity still eludes the marketplace. The investors who are trolling the market (including us) are still in “search and rescue” mode looking for bargains and opportunities while anticipating that the economic upswing will eventually play out in the real estate market.
And it will. In fact, it is inevitable. The asset class which seems to have now found its general footing are investment properties, particularly rental. The considered thinking here is that with the mass influx into adulthood of the so called “Gen-Y”—that 82 million Americans born between 1979 and 1999—their first toehold into adult life will be in apartments, and later into condominiums or starter homes, depending on the metropolitan area in which they reside.
Accordingly, apartment investment has been brisk, and now apartment development is starting in many parts of the nation. That is the dominant asset class which is capturing the interest of both small to institutional investors.
The commercial markets, with the exception of these relatively few trades in the Core and A property classes, are likely to lag. Not everyone believes this, but we see continued commercial asset weakness on the theory that companies will be reluctant to expand quickly in the service sector after having contracted so large and dramatically over the past four years, thereby impacting demand for office space.
And the retail sector is lurching nationally following the engorgement of new shopping center development just prior to the recession, which was quickly followed by the reality of an overbuilt sector when consumers reeled in their spending at the advent of the recession. In short, we do not see consumers coming back quickly, and perhaps never at the consumption levels prior to the run up.
Couple this with the competition from the Internet to “bricks and mortar” retailers—think Blockbuster video, Borders books and Sam Goody music—and you’ve got the picture of a retail sector quickly altering their merchandising concept not to the benefit of the shopping center or strip commercial space.
A lot of “re’s” are in the air in the coming years—redevelopment, repositioning, rehabilitation, reuse—and ground zero for these activities will be the nation’s aging inventory of commercial spaces.
The amazing part of what we now dub the “Great Recession”—it wasn’t nearly a “Depression” but it was the greatest economic event in our adult lives—is not that it happened. After all, capitalism is inherently susceptible to economic cycles. We just have come down from one that lost more American jobs (8.4 million) than the last two combined! What is more amazing is that this roughly three year event compressed changes in America that would otherwise have taken place over ten or twenty years.
Essentially, the recession cleared the market of old line companies, out of date jobs, overpriced assets, corruption in the financial markets, bad government oversight and cronyism at every level of our economic society such that the nation can now stand and renew.
In the real estate world, a new economic base has been established. Asset values across the board are lower, reflecting high vacancy rates, lower rental revenues, and less demand expressed through slower absorption.
But this only portends opportunities ahead.
There still appears to be no end to the opportunities to purchase land at, or near, bottom-of-the-cycle prices. Simply put, the markets have not sorted themselves out yet such that real demand has presented itself for much new development. Development will start to take place as a second phase of the recovery. First, currently vacant inventory will have to clear the market. Depending on the metropolitan area, but frankly in most, this process still has yet to be completed. But when it does, there will be an inevitable push for more inventory, we think in particular inventory for residential. Our overarching reasoning here is that the nation is growing again, both economically and demographically.
So, the “clouds” seem to be dissipating. We now have a much clearer picture of the future. We know the nation is now “off the mat” economically with momentum that probably cannot be stopped by events like rising oil prices. It’s a durable, and eventually will become, a strong recovery. It is just going to take some time.
Or, as Laurel often quipped to Hardy, “That’s another fine mess you’ve gotten us into.” But if you ever watched an episode, the eternally optimistic duo always got out of it!