Recently Sam Zell, legendary investor and chairman of Equity Group Investments, was interviewed on CNBC in an hour-long segment. During this interview Zell gave his opinions on the overall health and future of commercial real estate.
It?s all about supply and demand
Zell: ?Real estate is all about supply and demand. We have built nothing since July of 2007. That?s the good news. So we?ve had no additional supply. The bad news is that we?ve also had less job growth and less demand. So literally, the existing facilities are getting filled up, but at rates that don?t reflect new cost. So I think (commercial) real estate still has another couple years to get its act together.?
Zell is correct. The supply and demand levers are like the hot and cold spigots on a bathtub and the volume of these levers are controlled by factors such as unemployment, consumer confidence and technology, among others.
The graph to the right provides supply (annual construction in dark blue) and demand (absorption in light blue) trends, as well as vacancy rate patterns (red line), for the apartment, office and retail sectors. Click on the graph to?enlarge.
This supply and demand model is best explained by Victor Calanog, Ph.D., Chief Economist with Reis, Inc.:
?It is indeed about supply and demand, but specific sectors have to live with different mixes of these two key drivers. For the apartment sector you had moderate supply growth through 2008, which dropped off severely from 2009 to 2011. Combine that with surging demand from renter households that are postponing decisions to buy homes because of the flagging for-sale sector, and you?ve got a great combination. That?s why vacancy rates dipped by 280 basis points in 2010 and 2011, ending at 5.2%, the lowest vacancy rate in more than a decade.
For office properties it?s a little less ideal. Anemic job growth means less demand for office space, but supply growth was halved from 2004 to 2008, compared to 1998 to 2003. As a result, office properties have less of a glut to deal with.? That?s why vacancy rates have begun to climb downwards, from a peak of 17.6% in end-2010 to 17.3% by the end of 2011.
Retail properties have it worst. There was little slowdown in building of retail across the nation until 2008, although the spigot was turned off abruptly in 2009. But with the large amount of overhang, and lackluster demand for retail space from tenants who are still rationalizing their need for physical space given competition from online sales, you?ve got vacancies moored at 20-year highs.?
According to research provided by Jones Lang LaSalle, new construction and development is limited and there will not be much new activity over the next three years. The most active development markets include New York, Washington DC, Boston, and San Francisco. These densely populated ?gateway? markets are much more attractive as they have recovered quicker.
Excerpt from the article written by Brad Thomas, Contributor to Forbes.com. Click here to view the original article in its entirety.
Source: http://blog.josephbernard.net/?p=672
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