Has Commercial Real Estate Peaked?
The current commercial real estate environment has investors and users alike in a constant state of “where are we in this cycle”. The biggest issue today is wondering if we have peaked and if a purchase today could lead to buyer’s remorse tomorrow. Brokers are now challenged with not only justifying purchase price, but also giving buyers a comfort level on the acquisition. Users are easing back into the driver’s seat of this market. Typically, a user can weather the volatility of a real estate market better than the investor. Ultimately, the user will need the space regardless of values, while the investor will need to replace a tenant at a potentially lower rate. This factor, coupled with the thin margins of today’s investment sales, makes investors more conservative, allowing users to get back in the market. Landlords have been the big winners in recent years - rental rates have nearly doubled since 2009, making their investments more valuable and profitable. The concern for them is how long should they reap the rewards of high rentals before selling off at peak prices. If they sell to soon in this cycle, they may miss out on these rich rents. If they ell too late in the cycle, they may miss out on the high valuation. Developers are facing the biggest hurdles today. Land values are also at all-time highs. Thinning margins and competition raise risk for developers, but the biggest obstacle continues to be the entitlement process. Developers are concerned that if the market turns for the worse the valuations for the land today may hinder leasing potential of a fully entitled project that can take up to two years. Overall, the landlords, users and developers we are working with still feel there is meat on the bone and that this current cycle will continue for at least a couple of years, not withstanding any outside political turmoil that can change the climate of all markets. Alessandro Conte, CCIM, SIOR is an executive vice president at The Blau & Berg Company.