The Fundamentals Reality: Weak Demand
We all know about fundamentals and supply and demand. But the supply and demand that many real estate investors seem to focus on today is capital. They count on more capital to make things better. They hope if capital comes back into the markets we can start doing more deals again, prices would increase in the augmented trading, and the cycle would ramp up. Bad deals transacted near the last market peak might have a chance, if they could be bailed out by appreciation.
In fact, the really smart market timing players did focus on capital flows—they started selling when markets began overheating circa 2005, and they are ready to make deals with their dry powder now. But the smart money realizes at the bottom of the cycle they need to focus on the traditional supply and demand drivers which dictate property revenues--higher occupancies and rental rates. They are wise to pay attention to the fundamentals that signal what tenants are going to do.
Apartment investors figure their time is coming sooner for improved revenue outlooks than for players in other sectors. They figure pent up demand from doubling up echo boomers, aching to have their own places, will push occupancies and rents once the jobs picture improves. Makes sense, but where are the economic drivers to kick hiring into gear? It hasn’t been talked about much, but the BP oil disaster is bound to dampen jobs numbers in coming months. And state and local governments will continue to pare spending, which ends up decreasing public employee work forces as well as other jobs. We keep hearing about new clean energy jobs, but China can and is producing solar panels and windmill parts—at wage rates well below what our workers will accept. And we keep worrying about a double dip, but it looks more likely that we will endure an extended lackluster period where companies maintain profits through “productivity” gains—that really means not hiring much and doing more with less, while our major industries get out competed globally by countries with lower living standards and compensation rates.
Office owners should be especially concerned about the demand side. Companies realize they just don’t need as many people working under their roofs. The days are over when every executive had a secretary. Heck the days are over when whole departments have any administrative help. Filing clerks gone, receptionists have been replaced by voice mail, and who needs a girl or boy Friday when you have a blackberry or I-Pad? There’s one company I’ve been working with recently where neither the CEO, COO, CFO, head of transactions or head of marketing have any admin support. These are executives who 15 years ago each had at least one secretary to do their bidding.
Then there are the companies that used to have regional offices minding local business. How many companies do you know who still claim a regional presence, but their executives work mostly from home? Do you think companies will suddenly find the need to lease up new space in regions when these arrangements have been working just fine without the added overhead?
On the retail front, the consumer binging that we all got used to is done and basically dead. A combination of wrecked balance sheets and financial regulation forces lenders to get rational about credit practices. People with underwater mortgages and already unpaid credit card balances on maxed out cards aren’t going on shopping sprees anytime soon, especially when the jobs market continues to look so tenuous.
We wonder why the capital markets haven’t loosened up and won’t get untracked for some time to come. Tepid demand for space will tell the story and that’s what we all should be focusing on.