Emerging Trends

Hoping this graph is correct on job growth - but not cost.


Accounting firm PriceWaterhouseCoopers in partnership with the Urban Land Institute has released their comprehensive 2010 Emerging Trends in Real Estate. As you would expect, some of the report is decidedly negative and discusses such topics as “Coping with Pain.” While it might sound like a self-help book, we are after all experiencing the worst downturn in the industry in 80 years. The story of the past is written, however, and the fact that this has been and will be a tough time for landlords is not new news. 

Some points of interest from the report: 

“A sense of nervous euphoria grows among liquid investors who can make all-cash purchases..(and) if patient, daring and selective they could score generational bargains…once owners cry uncle.” 

Also on the investment front: “Don’t rush – early is the new wrong. Transactions trigger points include improving jobs numbers…and stepped up tenant deals. Ignore theory, require empirical evidence.” 

“Many real estate firms go into survival mode….demand intensifies for real estate executives who know property operations or have strong tenant and client relationships. “They keep the best and downsize the rest.” New development “doesn’t pencil out when investors can buy existing real estate in the bargain basement.” 

The report calls Commercial Mortgage Backed Securities (CMBS) financing “Frankenstein’s Monster” and calls for the “kick-the can down the road mentality” to end. It goes on to call CMBS “a huge time bomb…wrapped in a ball of confusion.” 

It also calls for debunking the myth of that diversification overcomes systemic risk — it doesn’t. “In the global marketplace, all regions and credit markets are inextricably link(ed).” We suppose real estate isn’t local after all. 

In terms of markets to watch, the report is enthusiastic about Washington, D.C. (thanks to the Feds) and calls San Francisco, Boston and New York interesting. Outside of those markets, and for the first time in memory, the report is “Not bullish on anywhere.” 

Finally, the report gives advice to both tenants and landlords in commercial space: 

“Landlords may preserve cash flows through new leases at lower rates, but could impair properties’ long term value. In some cases, (landlords) will do better standing pat. If a big tenant fails or moves out, you’re cooked.” 

Tenant’s shouldn’t “sign new leases unless they extract healthy concessions on longer terms, and should steer clear of negotiations if owners look like default candidates..” 

The authors have written a cogent, if sobering report on the real estate industry. It is, however, largely from the perspective of landlords and investors. Tenants still have an historic opportunity to reduce cost now, and with the power of a long term lease, to lock that cost advantage for years to come. 

Ken Ashley

One response to “Emerging Trends

  1. Good post. I bet if we went back and researched ULI’s and PwC’s comments about CMBS when they first emerged in force in the late 1990s, they would praise the new funding mechanism. Now they trash CMBS, and probably deservedly so.

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