Green Shoots for Developers at the Edge of the Fiscal Cliff

After nearly five fallow years, developers start to see (a few) opportunities beyond the obvious ones for apartments. In any gateway market, building an efficient floor-plate, LEED gold or platinum office tower will command attention from tenants who start to pay up for the chance to reduce their operating costs. They can lower utility bills, gain greater flexibility and decrease future expenses in altering layouts, win kudos and possibly attract young talent for using environmentally correct space, and buy into the notion that more natural light and fresher air creates healthier, more productive work environments. These new wave buildings successfully leech tenants out of last generation space and can be cheaper to build than buying existing trophy product at current cap rates. The only losers here are past generation, brown buildings which cannot hold onto tenants. It’s another sign that pricing for existing trophy product in these 24-hour markets may have peaked or at least leveled off. 

Logistics and distribution space—again in the prime gateway distribution hubs—also may be ripe for selective new development as major e-commerce purveyors ramp up shipping activities near population centers in capturing greater retail market shares.

The suburbs certainly do not need any new bricks and mortar retail, but urbanizing suburban nodes and city high streets look to integrate more store space, especially big box formats. Retailers work with apartment developers and planners to assure pedestrian friendly environments as part of transit oriented projects and town center construction. The real opportunity in the burbs should capture the fancy of real visionaries—how to repurpose failing regional malls, half empty office parks and  challenged strip centers—all with under-utilized parking space.

Outside the strongest commercial markets, apartments remain the only game in town and building activity may start to get ahead of demand over the next 18 months in some places without barriers to entry. Watch garden-apartment rents begin to soften in some of these usual-suspect hot growth Sunbelt suburban agglomeration metros.

It’s quite amazing how politicians of every stripe dance around at the edge of the looming “fiscal cliff.” The assumption by most in the real estate industry as well as the public at large is that after the elections some accommodation will occur to avoid any pain. But pain is baked into the equation and that’s why the candidates do not want to discuss it—talking sacrifice repels voters. What they won’t tell you is that taxes will almost certainly increase (payroll taxes for starters) for just about everyone, government spending will decline (that means both public and private sector jobs will be cut), and entitlement programs will be reduced (stressing seniors and the poor). The alternative is to escalate further the national debt and raise debt service costs, which would explode if interest rates ever ratchet up. Any way you look at—the economy takes a necessary hit. Or do we continue to delay the inevitable? I wouldn’t be investing in the stock market right now and I wouldn’t be overpaying for real estate.