2019 ROI First Quarter Edition 2019 - HIS Capital Group | Seite 55

• Values for existing cash flowing assets should remain
stable in the face of slowly rising interest rates. Properties
being offered for sale during their initial lease-up period
will likely see values closer to replacement cost, depending
on the specific market.
COMMERCIAL REAL ESTATE AND
THE NEXT CORRECTION
In a round robin discussion of commercial real estate C-suite
execs around the globe, most said they aren’t worried about
an economic slowdown hurting the property industry. That
isn’t to say they don’t think a downturn is coming in the
next few years most do but think the CRE industry is healthy
enough to withstand it.
Their advice on staying healthy if the general economy
drops: Diversification is the main thread most suggested
building up a portfolio that spans geographies and property
types (including some specialty sectors like student housing
or healthcare real estate) to insulate against specific pain
points. Focusing on Class-A was another common response;
many of the execs think Class-B and C product may suffer
when the economy goes south.
Insights from the conversation reflect that most are
in agreement. Here’s all you need to know about the
shape of CRE:
• Industry must adapt by reducing exposure to very
conventional, plain-vanilla office and retail and investing
in specialty CRE that addresses changing lifestyle needs
such as technology, healthcare and education.
• The biggest medium-term risk is probably a global
slowdown that would be stimulated by multiple factors
rather than one coordinated event as we saw in the Global
Financial Crisis. Central banks have limited tools at their
disposal to combat such a slowdown, so the feed-through
into the property markets could happen fairly quickly.
Looking around the world I am comfortable that the
real estate sector is well-positioned to weather such a
slowdown, with low levels of borrowing, restrained levels
of speculative development and an increasing investor
focus on income.
• Commercial real estate fundamentals across most of
the U.S. are sound, and new supply has been relatively
restrained. U.S. companies are in good shape, and there is
not a significant overcommitment on future space needs
by tenants. Outside of a few markets, there is no large
demand/supply imbalance. Even with the large volume
of apartments that have been developed in this cycle,
most markets are performing well.
• If we continue forward at current leasing rates,
occupancy rates and debt levels, CRE will not be
a contributing factor to the downturn. But once
a downturn begins, I think there will be several
ramifications. The demand for [shared workspaces]
will disappear, and WeWork leases for example will be
essentially worthless to landlords. • I think the next downturn could be healthy for our
industry, because we are at absolute capacity at trying
to build buildings, train workers, educate talent and
recruit talent. … Yes, retail has been dinged and office
is changing, but adjustments will be made. … But the
ability to find carpenters, engineers and the material
supply to build a house, that’s what worries me. So, I
believe we need a pause, and that a downturn won’t
require so much of an adjustment.
• Hospitality is “first in, first out,” so any downturn
will immediately hit revenue per available room and
hospitality numbers. But from the lending we are doing
in hospitality, everyone feels that this cycle is “long in
the tooth,” so nobody is getting out over their skis in
development or financing of new hospitality. • The last downturn was severe because of a lack of liquidity
in the finance markets, not because of a supply imbalance.
It was very disruptive, but I don’t see that; I see a normal
downturn where the laws of supply and demand take
over, and we have more of a balance than we have right
now.
• The next downturn in CRE will be catalyzed initially by a
stagnant economy and low growth followed by multiple
years of mild-to-escalating recession, credit re-rating and
demand for higher risk premiums by capital providers • The nation is at the tail end of the longest economic
recovery we’ve had since World War II and it’s naive to
think there’s not going to be a correction that will impact
real estate.
54
HIS Capital Group