{"id":1004302574,"date":"2019-02-28T00:02:29","date_gmt":"2019-02-28T08:02:29","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004302574"},"modified":"2025-02-27T22:21:03","modified_gmt":"2025-02-28T06:21:03","slug":"people-get-ready-for-extended-slowdown-in-cre-demand","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/people-get-ready-for-extended-slowdown-in-cre-demand\/","title":{"rendered":"Get Ready for an Extended Slowdown in CRE Demand"},"content":{"rendered":"

\"\"<\/a><\/p>\n

In the military, they call it \u201cshort-timers attitude.\u201d In high school, \u201csenioritis.\u201d In politics, \u201clame duck season.\u201d<\/p>\n

For real estate, we have \u201clate cycle syndrome.\u201d<\/p>\n

READ THE DIGEST<\/a><\/p>\n

\"Hugh<\/a>

Hugh F. Kelly, PhD, CRE<\/p><\/div>\n

A who\u2019s who of the commercial property cognoscenti gather each December in New York for ULI\u2019s McCoy Symposium. Late cycle risks were a prominent topic of discussion. Risk pricing, for instance, was seen as ripe for adjustment with cap rates rated as \u201ctoo low\u201d given prospects for income growth and capital appreciation. One participant suggested that a downward price correction of about 10 percent could actually be healthy for the industry. Lenders have generally been disciplined, but those financing projects at the riskier end of the spectrum may face trouble as the cycle turns. These include regional banks financing construction projects and mezzanine lenders who have not delved deeply enough into property inspections. Then there are niche investment areas, including self-storage, senior housing and student housing, where there has been a surge of development that may be outstripping underlying demand.<\/p>\n

There is surely value in acknowledging that the business cycle is running out of steam, and the real estate cycle with it. For some time now, these columns have been advising that the smart money should be playing defense. A year ago, this space indicated five imbalances to monitor: labor conditions, the housing market, excessive equity market valuations, the flattening yield curve and potential sudden disruptions.<\/p>\n

Economic Indicators<\/h2>\n

Despite the stimulus of the 2017 tax cuts and an outsized Federal spending spree, labor market constraints kept employment growth between 1.4 and 1.8 percent (year-over-year) from January to December 2018. Job gains averaged 220,000 per month, about the same as the prior four-year period and well below the 250,000 achieved in 2014. And I wrote in this column in September, the Congressional Budget Office is forecasting<\/a> a sharp slowdown in job growth beginning in late 2019.<\/p>\n

New single-family home construction contracted 1.9 percent year-over-year as of November 2018 (the most recent data available, due to the government shutdown that has delayed release of year-end 2018 statistics). The National Association of Home Builders\u2019 Housing Market Index stood at 58 in January 2019, down substantially from 72 a year earlier. Average fixed-rate home mortgages were 4.54 percent in 2018, up 55 basis points over 2017 and the highest since 2010. Unsurprisingly, housing appreciation is slowing and nationwide it takes an average of 87 days to sell a home. Realtor.com observes that sellers are more frequently cutting prices in an effort to stimulate purchaser bids.<\/p>\n

In November and December, the equity markets exhibited extraordinary volatility, and all the major stock indexes lost value during 2018. The usual daily rationalizations of the markets\u2019 movements should be largely discounted as displaying what Nassim Taleb calls \u2018the narrative fallacy\u2019\u2015our tendency to ascribe simplistic, short-term cause-and effect stories to complex economic stories. Fundamentally, however, the markets\u2019 fragility reflected two major conditions. The first is that the two-year, 44 percent rally in stock prices\u2015which came on the heels of a seven-year bull market that had already seen values rise more than 125 percent\u2015represented a market climax fueled by one-time boosts to after-tax corporate earnings that are unsustainable as a trajectory. The second was a realization that the worldwide economic growth has been attenuated, and businesses face a less robust outlook for earnings in the decade ahead.<\/p>\n

Tariffs & T-Bills<\/h2>\n

The fourth element discussed here a year ago was the flattening of the yield curve. That trend has proceeded along the lines anticipated. While the 10-year Treasury (at 2.72 percent) offered about the same yield on Jan. 29, 2019, as it had a year previously, the yield on the three-month T-bill had moved up to 2.42 percent from 1.44 percent 12 months earlier. Thus, the spread between the two maturities had narrowed to 30 basis points from 126 bps. That compression in the yield curve almost infallibly presages an actual inversion (with short interest rates rising above long rates). And an inverted yield curve is a reliable recession indicator.<\/p>\n

The final risk, potential sudden disruptions with rippling impacts, are if anything more pressing today than in 2018. Already we\u2019ve had a government shutdown of unprecedented length cost the economy at least $11 billion and perhaps more if the private sector reacts by increasing the price of uncertainty. Increasingly, a \u201cno deal Brexit\u201d seems probable, sapping the European economy. Tariff policy is impacting U.S. manufacturing costs and agricultural trade flows, and the prospects for escalating U.S.\u2015China tensions are discouraging. The exposure of U.S. businesses and basic infrastructure to cybersecurity disruption is highlighted to an alarming degree in the U.S. intelligence community\u2019s 2019 Worldwide Threat Assessment<\/em>, a document that should be required reading for all business decision-makers.<\/p>\n

Perhaps, though, the most significant item I\u2019d like to underscore is that the very allusion to the late-cycle syndrome suggests that, following a recession, we will inevitably \u201cget back to normal.\u201d Normal, in this view, is the growth pattern of the economy in the most recent upcycle. But the odds are that the 2020s will see growth at a mere fraction\u2015around one-half\u2015of the expansion following the Global Financial Crisis. Are the real estate markets prepared for that kind of lengthy slowdown in demand? I suspect not.<\/p>\n

In the words of Curtis Mayfield, \u201cPeople, get ready.\u201d<\/p>\n

Read the March 2019 issue of CPE.<\/em><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

An inverted yield curve and forecasts of a dropoff in job growth are among the signals that the industry\u2019s long, great ride may soon be ending, says economist Hugh Kelly.<\/p>\n","protected":false},"author":1082,"featured_media":1004303312,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,37752,21825,23891],"tags":[],"class_list":["post-1004302574","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-research-center-economy-ecommerce","category-finance","category-national"],"acf":[],"yoast_head":"\nGet Ready for an Extended Slowdown in CRE Demand - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/people-get-ready-for-extended-slowdown-in-cre-demand\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Get Ready for an Extended Slowdown in CRE Demand\" \/>\n<meta property=\"og:description\" content=\"An inverted yield curve and forecasts of a dropoff in job growth are among the signals that the industry\u2019s long, great ride may soon be ending, says economist Hugh Kelly.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/people-get-ready-for-extended-slowdown-in-cre-demand\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2019-02-28T08:02:29+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-02-28T06:21:03+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/02\/economist-digest-march-19-traffic-jam.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"900\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Hugh F. 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