This Cycle Has No End in Sight

“There is no end to the cycle on the horizon,” said Michael Van Konynenburg, president of Eastdil Secured. Van Konynenburg gave the National Real Estate Economic Outlook keynote speech at Allen Matkins' annual View From the Top. While his tone was cautious, he saw no sign of a recession and a return to slow and long growth. Speakers on the investment sales experts panel—which included Kevin Shannon, president of West Coast capital markets at NKF; Darla Longo, vice chairman and managing director at CBRE; Chris Graham; managing director at the Blackstone Group; Tracey Murphy, executive VP of life science and Northern California at Kilroy Realty Corp.; and David Thomas, principal at LBA Realty—

shared the sentiment.

“We could have a unique window where, despite being low in the cycle, could have potential continued gross,” said Van Konynenburg. “We are doing a lower for longer cycle, rather than a growth cycle. We have a lot of risk, but we think there is still a few more years in the cycle.” On the investment panel, Graham also forecasted an extended runway based on job growth. “I am relatively bullish relative to our economy,” he said. “Usually before a recession, there is a sense of euphoria, and it doesn't feel that way. It feels like there is runway and on the West Coast, that is going to be driven by jobs.”

Graham is focused on office, which has seen increased pricing nationally. According to Van Konynenburg, pricing overall is well above 2007 levels, up 27% while S&P is up 70%, “but we are starting to tread water,” he says. Big deals are more impacted than small deals, and industrial and lodging are outperforming the former peak. Self-storage and malls, on the other hand, are underperforming.

The length of the cycle is creating hesitation. “The biggest fear with institutional clients is the length of the cycle,” said Shannon. “People feel like it has gone on too long. There are blips where things have paused, but barring a black swan event, there is a comfort level that interest rates are going to stay low. A lot of guys are looking at research and rent growth, and a lot of people are going more short term.”

The caution is actually good news, and may help to extend the cycle. “We have seen this cycle that capital is very disciplined, and no one wants to overbuild,” said Longo. Thomas adds, “The lessons that we learned is that we want to focus on better locations. Because when the tide goes out and you are in a bad location, you get hit harder.”