Is the Commercial Real Estate Market Cooling?

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In my humble opinion - yes. I read with great interest - in this publication - the residential real estate trends published by my colleagues - Jon Lansner, Leslie Eskildsen, and Jeff Lazerson. For weeks now - we have noticed more houses for sale, a greater supply of un-sold new homes, longer times on the market, and a departure from a seller’s market into a more normal give and take environment.

So what do residential swings have to do with commercial real estate, you may ask? Plenty! You see - what happens residentially portends the haps in my world - generally by 12-18 months. As an example - our residential peers experienced a dip in 2006-2007. The commercial music stopped in 2008. So, if the theory holds - expect a slow-down commercially sometime in late 2019 or early 2020. Full disclosure - I’ve been wrong before. 

Unfortunately, with commercial real estate - our metrics aren’t as defined as they are with houses - such as the number of new homes available, year over year sales, and time on market. We track gross activity, net activity, vacancy rates, and average lease and sale prices - by product category - retail, office, and industrial. Therefore, most commercial real estate professionals rely on a “gut-feel” of where we’re headed in their respective specialties.

So what is my “gut” telling me about our dealings? Indulge me, while I share.

Listings are hanging around longer. Smart owners are meeting the activity - regardless if the interest is below their expectations. As an example - we recently brought to market a beautifully well located building with complete updates and awesome features. Our pricing was aggressively high. Bang! We got two offers right out of the gate - albeit at a significant discount. Fortunately, our seller chose to deal. Those two were the ONLY buyers that emerged.

Folks aren’t making stupid buys. Two years ago - no asking price was too high. Now - establish a nutty ask - crickets!

Renewal activity is healthy. Companies aren’t moving. Traded is a relocation in favor of - “we will just stick around for another two to three years.” Consequently, a shadow market has emerged - which is difficult to track. If a lease is transacted - we can generally discover the terms. With a renewal - not so much - as this deal occurs with an owner and his occupant - without any published availability.

Pent-up demand is waning. In a down market, a new offering is met with a collective yawn. An up market will snatch the same building whenever there is a sniff it may be for sale. Now, when something new hits, we receive a few inquiries and a small percentage result in tours or offers.

The Labor Day bump. Generally - calls, inquiries, and requests to tour all take a hiatus in the summer months. Once the kids are back in school and the calendar adds an “ember” - things heat up. Not this year. Labor Day has passed - right?

Certainly in-exact. But I’m willing to trust my gut. It’s not mislead me to-date.

I’d love to read your comments. What are you experiencing?