We're now well into the development stage of the real estatecycle—even though commercial vacancy rates are higher than averagein many markets this late in recovery. Construction activity isstill only about half the last peak, a healthy sign of stillsomewhat restrained lending, but tenant demand remains lackluster.Office developers and their money partners probably properlycalculate in many cases that their new technologically-advancedproduct can lure tenants out of last generation properties,creating value above project cost. It's the older buildings,losing tenants to the upstarts, which will likely suffer theconsequences of demand anemia not the new projects. And the lowerdown buildings stand on the quality pyramid, the greater the riskof obsolescence fatigue setting in followed by value erosion.
So that leads to wondering about why some investment managersare paying record price-per-pound amounts in New York, Los Angelesand San Francisco for older product in fringe, but hopefullyup-and-coming, downtown neighborhoods. And when I mention olderproduct we're talking 80- and 90-year-old buildings. Would notthese investors be better off at this stage of the cycle developingnew rather than making bets on restoring really old?
I guess you can convince yourself that it is worth making a beton neighborhood revivals driven by tech companies, youngentrepreneurs, hip retailers, and trendy restaurants. That's theplay in New York's meat packing district, LA's Arts District, andvarious wards around San Francisco's downtown. High ceilings,artisan detailing, open floor plates in old warehouse buildings,constructed to last with thick masonry and cast iron can have anappeal to store chains and creative shops.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
