Commercial real estate is one of the top investment classes across the globe. Here in the US, we’ve seen equal opportunity to both feel optimistic and pessimistic about the CRE markets chances of success in the next 12-18 months. But days like today can feel crazy. I’d encourage us all to take a deep breath and view things in a larger timeframe. As most traders tell us, “when in doubt…zoom out!” So let’s take a look at the whole enchilada (not just our brokerage accounts) today.
CRE is massive and both sides of this coin can find ammunition to feed their position. With positive developments like opportunity zones, low interest rates and business growth many developers and investors are doubling down on the asset class. For the pessimists they can point to to variety of factors, from trade/tariff risks, oil prices, geopolitical strife, the coronavirus and even the length of this bull-cycle (which is now a decade plus in the making). However, commercial real estate by its very nature has a longer outlook than most markets and many investors are continuing to press forward.
Point in fact, most investors and experts expect the economy to continue growth at a clip of 3-4%, with CRE investment topping $500B. As is often stated in our industry, “CRE is a big ship” and that adage holds true. Generally financed projects are years in the making and shock-events like this past weekend’s oil pricing war don’t affect mid/long-term outlooks. CRE is steady, especially when traditional markets suffer.
What we’re really trying to project or “bake-in” today (so to say) is the uncertainty of the current market. Short-term indicators look increasingly bearish and volatile while mid-term environments are boosted by relatively strong growth and record-low unemployment numbers. As Seinfeld loved to opine…”What’s the deal???”
For the local CRE owner though, many of these macro factors don’t hold much substance when your primary focus is just getting vacancies filled, retaining existing tenants and optimizing returns on your assets. In the Non-REIT (and most common) view, real estate is hyper–local. So the GDP numbers and projections on a global scale do matter, but they often feel like the do not matter as much as the tasks at hand. This is true not only of owners, but largely brokerage professionals as well. Talking points only go so far with clients when business is about results. However, these factors do have an impact so it’s worth taking them into consideration.
Locally here in Texas, things are darn good. Friendly business environment, historic growth, hiring and unemployment at record levels…and we’re now the third largest producer of oil in the world (just little ol’ Texas). That’s good most days, just not today. In our state, we’re massively influenced by oil’s comings and goings. Not as much as we used to be but still, many of our largest employers and projects depend on a strong energy economy. Austin is one of the strongest CRE markets on the planet and Houston/Dallas and San Antonio continue to see robust investment and development projects coming on line. If today seems bleak….zoom out 🙂
As you might suspect, Texas is now a microcosm of what’s happening globally. We face uncertainty with the coronavirus (cancelling of SXSW first and foremost as an example) along with oil’s challenges. The good news? Most economists of substance are projecting a short-term hit. If we see a negative rate of GDP growth (something like -2% this quarter) it’s likely to be contained to one quarter and if it is, we’ll recover any losses in a HUGE way in the subsequent quarters (think 6-7% comeback).
Personally, I think we’ll need to see a vaccine for the virus (even if fears are overblown with summer/warmer months incoming) and some stability return to oil prices (even if they are lower for now) for the bullish mid-term trend to continue. Honestly though? Our biggest risks are the sins of the past we tend to repeat…overbuilding and over-indebtedness. There’s good reason to think we’ve avoided that in CRE this time though, as the rise has largely been fundamental. Financing is cheap, efficient and debt has a ton of room to grow before it becomes a problem.
So what is the deal then? How do investors and owners of CRE bake-in these types of uncertainty, mixed-signals into their deals. Well, having survived and profited in the 2008 crisis (much worse than now IMO) I’d recommend the following, as the great Aaron Rodgers once opined…R-E-L-A-X (seriously).
Here’s the deal with today’s activity, it’s just that…today!
- Now is not the time to panic. Short term events in their own stock do not damage the longer trends of growth and business successes. Stay the course.
- If you have a project ongoing, keep it going. No sense in abandonment when you’ve likely committed an enormous amount of capital already.
- Got a deal you’re working? Hustle, get it done. Vacancy is a red-line on your building’s income statement every day but even more so in times of uncertainty. Close the gaps and sign a lease.
- Tighten the belt operationally and manage efficiently. If you’re considering those big capex projects wait a quarter, let’s see things settle.
- REDUCE risk, yes I recommended you get deals done ( I always do) but offloading risk to the tenant or others is a smart-move in today’s uncertain environment.
3 Rules to Live by in Commercial Real Estate
- Income and cash is king, in any market condition. Sign the leases!
- Sharing the risk on a deal is no longer a caveat, it’s the rule. Find ways to offload deal costs.
- Make decisions with a long-term outlook, not a reactionary mindset.
Uncertain environments should not cause panic, quite the opposite, they should cause opportunity. Those who lean-in to conditions are the wisest ones come decades later, just ask folks who doubled down in ‘08-10. We haven’t seen enough evidence yet to warrant a worldwide panic, my humble opinion is to stay the course and execute the plans you have for your real estate. Oh, and if you want to learn how to offload risk?
You should check out our company Otso, through our industry-first Guarantees we literally help Landlords get deals done and offload risk while giving tenants capital flexibility. Hang in there! The CRE world will still be here (and growing) tomorrow 🙂
Reducing Risk in a Real Estate Lease