NEW YORK CITY-By virtually all accounts, it’s an odd recovery . . . slow, with meager job gains and with a commercial real estate sector that is performing atypically ahead of the greater markets. We reported as much in a recent story on the growth in real estate job postings and how in the months past, they have outdistanced the numbers being reported by the US Bureau of Labor Statistics.
In that article, we posed the question: Is commercial real estate becoming a leading . . . as opposed to the traditional trailing . . . indicator of economic trends. Since that story appeared, we’ve tracked down a number of industry heavyweights to gauge their ideas on the topic.
Alas, the general consensus is no, and bustling though it might be, it might be more a function of pent-up demand than an actual sea change in our economic measures: Here’s what they told us:
“Commercial real estate, generally, is a trailing economic indicator,” says Sabal Financial Group CEO Pat Jackson (the italics are his). “Absorption, spatial increases and rent increases all follow such general economic improvements as hiring and job growth and increased consumerism. This is true for most income-producing commercial property sectors, with the exception of multifamily whose growth is determined by the population’s level of certainty about purchasing a new home.”
At the very least, signaling a major change in our measures of growth (or contraction, for that matter) takes more than a single cycle. So said Richard K. Green at our recent RealShare Investment & Finance Conference in San Diego: “You can’t make such inferences from one cycle,” said Green, who is director of the USC Lusk Center for Real Estate.
I’m not sure that CRE employment is a leading indicator of any kind,” says Massey Knakal chief Bob Knakal. “The development market was so decimated during the downturn that the pendulum is simply swinging back today, and development-oriented jobs were particularly strong. This jives with the frantic pace of land sales in New York City and nationwide, and the need for workers at the companies that are going to build those buildings.
“The question really becomes is the development market a leading indicator of the future?” Knakal asks, and then provides the answer: “I think it’s an indicator of sentiment more than of tangible traction in the economy, but one may actually lead the other.”
Even if the CRE market hasn’t quite broken the fiscal-measures ceiling, there can be no denying its momentum. Not only does the pace of job postings bear this out, but so does the performance of many of the sectors within the industry. Cassidy Turley bears this out in its most recent report:
“Even in this slow 2%-GDP recovery, there are certain sectors that are not only performing well, but thriving. The most notable winners include multifamily, big-box distribution centers, high-end office, healthcare real estate and virtually any property type that is newly built or newly renovated.
“There are a number of forces at work that explain why these CRE sectors are winning in this recovery,” the report goes on to say. “For instance, the rise of e-commerce and mobile technology is contributing to the massive surge in demand for distribution-center space in multiple markets across the country. Some forces reflect a more risk-averse, practical consumer, which explains some of the shift in demand from owning to renting, from large space to smaller space.”
Some other drivers of this momentum, as Cassidy Turley sees it are:
- “Eighty-five million baby boomers are getting older, sicker and fatter, creating a healthcare bonanza. Sales of healthcare real estate posted a record high in 2012. Healthcare employment has increased four-fold since 1990 and is driving economic resurgence in markets such as Raleigh, Nashville, Houston, St. Louis, Minneapolis, Pittsburgh and Louisville. On its own, Obamacare will generate demand for an additional 46 million square feet of new MOB development by 2017.
- ”E-commerce growth is triple the rate for traditional retail and is driving the growth of bulk warehouse properties, many one-million-square-foot-plus. We predict 80 million feet of demand over the next few years in a marketplace that has little inventory to meet e-commerce fulfillment requirements.
- “It’s no secret that multifamily has been the leading CRE sector during the recovery, and we don’t see it abating. The primary renter demographics will grow by 2.2 million annually over the next three years and continue to drive multifamily demand – potentially 50% above the norm without taking into consideration pent up demand unleashed by the continuing recovery.”
So while the surge in the commercial real estate market might not be a watershed in macro-economic terms, neither is it sticking to the mold of trailing the economy by its traditional six-month lag.