Far be it from me to throw cold water on a good thing
Contributor Post By Richard "Rick" C. Lackey, Jr.
What was it we old guys said after the 1980's cycle bust? Please just bring back the 80's and I promise not to throw it away the next time. Are we repeating our mistakes? A lot of people in different markets are talking about their concerns for overheating. Add the drop in oil prices and its potential impact to the stronger oil based economies like Texas and…Wow! There are a lot of moving pieces in the market right now. It seems every time this happens we all have great excuses for what it is not happening.
Far be it from me to throw cold water on a good thing but consider the following:
* The recession officially ended June 2009. If commercial real estate cycles are 7- 9 years long, where are we in the cycle? I know each cycle is different, but are we reaching the peak?
* Job growth drives all occupancy increases and while the country continues to add new jobs, some of our strongest job creation cities are more than tapping the breaks. Remember commercial real estate is a lagging economic indicator.
* In the January Houston REAL Professionals mastermind group meeting, a member reported 14 deals have died as the result of equity investors pulling out due to the drop in oil prices. There are plenty of markets without 14 commercial real estate equity deals period.
* The oil dependent economies are where much of the job growth has occurred and they have stopped adding new jobs. Are they the first to slow down? I recently read that a sure “canary in the coal mine” sign of economic challenges ahead occurs when high yield investments get closer to equities.
* There is a lot of capital chasing deals, equity and debt of all kinds are more aggressive.
* There are now over 48 CMBS lenders in the market and according to some of our commercial real estate capital brokers and attorneys a lot of the CMBS lenders are very aggressive.
* 100% spec office building construction is back in several markets (Austin, Houston, Dallas, Atlanta, Nashville, Charlotte among others). As more major corporations make relocation announcements such as Mercedes Benz (200,000 SF) and Bridgestone Tire (500,000 SF), will this fuel more 100% spec development?
* Multi-family development is coming out of the ground everywhere. And I know everyone says the numbers support more. Costs are increasing across the board, so now the talk is about "Micro Units" and "millennials!, millennials!, millennials!" Are the millennials ever going to want to own a house with a back yard and raise a family in the suburbs again? The answer du jour to that is that empty nesters will replace them. OK, but surely not all the units, and especially not the micro units.
* Last but not least, sub 6% cap rates all over the place (sub 4.5% on a lot of single tenant triple net deals - recently heard about 3.5% cap rate on a McDonalds land lease deal). The low cap rates are yielding super high prices and there is a feeling that there is no end in sight. If interest rates ever rise again, will these new development deals penciled in the 6%'s to sell in the 5%'s only be available to all cash buyers?
Is it beginning to feel like it has in the past cycles before or at the peak? I sure hope these indicators are wrong.
I am not going out to buy a new Mercedes any time soon and it certainly wouldn't hurt to begin saving some money.
By: Richard "Rick" C. Lackey, Jr.
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