When Will We Experience a Slowdown?

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When meeting with clients and prospects these days, most are curious about my opinion. Specifically, when will this frenzied market activity start to cool? Frankly, I’m shocked at the exponential rise in lease rates and purchase prices we’ve experienced over the past year. Talk to any commercial real estate practitioner and most will confess they didn’t see this coming. When our economy collectively pressed pause two years ago - uncertainty abounded. Most of us believed the pandemic was the black swan event that would derail the status quo. Yes. Certain segments of CRE have taken their lumps - office suites and brick and mortar retail. But, manufacturing or logistics oriented buildings continue to find favor. I caution all that my crystal ball is somewhat murky but share with them the things I watch as predictors.
 
Residential. A downturn in housing sales generally proceeds a stall in commercial activity by 12-18 months. Pre-Great Recession, there were myriad warning signs a slowdown was coming. Certainly, few of us were prepared for the severity of the dip. I remember one of my clients in the building industry was alarmed by the precipitous drop in new housing starts. His group supplied bathtubs for new housing projects. Companies such as these are a bellwether for coming attractions.
 
New construction. Currently, industrial demand far outpaces supply. We cannot build enough new locations to meet the appetite. Under construction inventory is being gobbled up quicker than a teen consumes an In N Out burger. Consequently, our stock - new and used - is significantly costlier. I’m presently watching the next round of lease and sale comps to gauge if the market will continue to rise or stagnate. Akin to lightning that precedes a thunder clap - we’re awaiting the next strike to determine proximity to asking rates.
 
Interest rates. The cost of money affects so much, I could spend an entire column about the subject. Suffice to say, we’ve enjoyed a decade or so of lifetime low interest rates. These cheap dollars fueled an unprecedented buying spree. Rampant inflation is rearing its head and causing policy makers to counteract. As of this writing the benchmark 10 year Treasuries are at 2.4%. Still puny if you’re a saver but at some point - investment returns will be impacted. Simply, capital will flow into a government backed issue vs a real estate investment if cap rates are comparable.
 
World events. Russia’s invasion of Ukraine has placed a crimp in the global supply chain of energy and food stuffs. Fortunately, even with our sanctions against Russian oil and natural gas - the United States is ok. But many European countries, such as Germany largely rely upon imported petroleum. As to food, Ukraine and Russia are two of the largest wheat producers and exporters in the world. Planting season is now. We only have a 90 day food supply, globally. And wheat is in everything! You can start to understand how this disruption can trickle down to all of us.
 
Industrial metrics. We still look at what’s available, leased, and sold on a daily, weekly, and monthly basis. How many spaces out of 100 are currently on the market? - our industrial vacancy results. In a normal market - which we haven’t seen since 2013 - 5-6 of 100 are available. We’re now fewer than 1%. In some size ranges there are none. Something quite catastrophic would need to occur in order to shadow normal.
 
Anecdotes. On the seller and landlord side you hear folks are pressing rents, achieving monster sales values and receiving unsolicited offer out the wazoo. Occupants bemoan raw material shortages, increased costs, fuel surcharges, lack of quality employees and increasing facility costs.
 
So, there are my “tea leaves”. I’d love to know what you watch in order to predict what’s coming.
 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.