WHAT LESSONS HAVE YOU LEARNED?
Cycles Rule! Despite the widespread belief, born of the recent high-times, that commercial real estate was no longer cyclical--or only mildly so--respondents to last week's Quick Poll apparently weren’t fooled. Some 75% of the 304 voters believe that the current slump will Teach Us That Cycles Always Rule. Another 23%, possibly taught caution by the lousy market, cautiously state that It's Too Early To Tell. Only 2% think that we'll come out of this recession-or-not Bulletproof. Richard Davidson, president and COO of Parsippany, NJ-based Coldwell Banker Commercial/Oncor International, has lived through a downturn or two, and he has his own thoughts on the subject. Here they are:
"If you look at cycles back to the early 1970s, we run on a 10-year cycle: five years of growth and expansion followed by two to five years of some sort of transition. What's different from what I have seen in other cycles is that you have the value side and the fundamental side, and they're not running together.
"The value cycle actually accelerated beyond the fundamentals cycle. As a result--and clearly it's a matter of availability and affordability of debt capital that has reduced the number of buyers--there's less competition for quality assets, which means lower pricing pretty much across the board.
"But, in terms of fundamentals, it's been a very interesting market. There was a lot of transparency in our industry as a result of securitized debt and the equity markets and the continued growth of institutional capital. If a project didn't make good financial or fundamental sense, it didn't get funded. It's not like the go-go days of the late 1980s.
"The key is that there was access to very affordable debt capital plus a tremendous amount of equity. The equity side continues, of course, and, even though values began their decline in the latter part of 2007, cash and low-leverage buyers saw real opportunity.
"My bet is that most respondents will say cycles will rule, and that it's still a cyclical business. That's how I cast my vote. But, because of the discipline that's being shown in the marketplace from a supply standpoint, we'll see a softening of cycles.
"We're not in the business of predicting the economy, so I wouldn't use the R word. But I think it will be relatively short -lived. Unless, of course, there's something looming within the economic picture that I don't understand that could have an impact on the commercial real estate sector."
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