Is the Industry Still Cyclical?

Say what you want about accountability and public status and SOX. The commercial real estate industry is still a cyclical beast, at least that's the belief of 89% of the respondents to last week's Feedback Poll. And it is the view as well of commentator Ward Caswell. Here's why:

"We've had a good run, and it's by no means over. But that doesn't mean that we're not cyclical. We've had this question every time a cycle has been running a long time We heard it in the mid and late '90s as well.

"But we need to separate this question into two tranches. First the leasing markets and then the sales markets. The leasing markets will remain cyclical. They're fundamentally influenced by the exogenous forces of the overall economy: consumer confidence, job growth, trade, the basic demand for space. You still have the fundamental lag of construction behind demand, which causes completions to come on line, even after the demand may have waned, which in turn causes vacancies to rise farther than they would have otherwise.

"What's different now versus two cycles ago and even the last cycle is the unprecedented transparency in the market. Smaller local or regional players may not have access to high-end forecasting tools, but they do have access to good data on availabilities, rents and construction. If they have brains they can put the puzzle together and see what's coming in the next couple of years. That should reduce the severity of the cyclicality of the leasing markets. It will still be cyclical, but the highs shouldn't get so high or the lows as low as without that transparency.

"Now, the relationship between the leasing and sales markets is somewhat tenuous. Certainly the rental and vacancy rates have a strong influenced on NOI. But there are still so many exogenous forces that influence real estate sales volume--the bond markets, other fixed income investments, the equity markets.

"What's different now is that corporate real estate has reached a tipping point of liquidity given the number of players in the game, the number of transactions and globalization. You've got a lot more cross-border deal flows than ever before. That means that there are different types of investors looking for different risks, returns and hold periods. It gives the owner who may want to get out the flexibility to avoid going rock bottom at the first sign of trouble. That should add a great deal of stability. It won't eliminate cyclicality, but it should mitigate the severity of those fluctuations.

"There is the capability for short-term foresight. Long term, if you could give me a good five-year projection on GDP, T-bill rates, interest rates and CPI I could turn around and give you a great forecast for sales transactions."