Late in the cycle?
The economy may be two years away from another downturn, real estate financial experts said Wednesday, but they don’t expect the commercial real estate industry to be pummeled as badly as it was during the last Great Recession, which lasted from December 2007 through 2009.
“Recessions come every 7 to 10 years. This has been a strong economy for a while. Whether it goes extra innings, I don’t know. With Trump politics, maybe there is a seventh-inning stretch, “ said Ronald Lamontagne, managing director, Americas Partners Group, (USA) Inc., based in New York. “We’re near full employment. Nearly all industries are having trouble growing the top line, so they’ve been squeezing on the expense side. I sense that we’re late in the cycle.”
Lamontagne was one of the panelists at the 8th annual Commercial Real Estate Forum held at the Westin Richmond by the Henrico County firms of Commonwealth Commercial Partners and Lingerfelt Commonwealth Partners.
The other panelists, Liza Scott, director, public equities and real estate for Spider Management Co. in Richmond, and J. Ryan Lingerfelt, president and chief investment officer for Lingerfelt Commonwealth Partners, agreed that the country’s third longest recovery on record is nearing the end of its cycle.
With March data showing retail sales and job growth as worse than expected, “I’m worried we are going to be surprised to the negative,” said Scott.
“Any kind of slowdown won’t be what it was in ’08. The fundamentals on the real estate side are more in check than in 2007,” said Lamontagne. While the $6 trillion U.S. commercial real estate industry saw office vacancy rates soar during the last recession as employers cut payrolls, he noted that there is not an oversupply of inventory at this time in the cycle, which will help when another downturn comes.
“I agree that more things are in check,” said Lingerfelt. “It’s been a great run. “
While President Trump aspires to push through tax reform, major infrastructure improvements and other polices that could affect commercial real estate, it’s too early in his term to assess how and if such changes could impact the industry, according to the panel.
Rising interest rates, though, will put pressure on real estate and corporate borrowing. “They will continually, slowly step up interest rates to make sure that the economy doesn’t overheat,” Lamontagne said of the Federal Reserve. “There will be some pressure.”
The good news for secondary markets like Richmond is that some investors are bypassing large gateway cities at this point in the economic cycle and are making investments in smaller cities.
“We invest in secondary markets, and we have an interest in the SunTrust building [in downtown Richmond],” said Lamontagne. “Richmond, Nashville, Austin, Charlotte are secondary markets that are quite frankly showing great returns on a risk-adjusted basis. I’m very excited about where the returns are in these markets. With a lower cost of living, it’s attractive for business to come and do business here.”
Nearly 300 people attended the forum, which also included a discussion on trends people can expect to see in commercial real estate and the future of retail.
Hot sectors right now include well located infill developments with grocery stores, industrial warehouses in the 100,000- to 150,000-square-foot range and medical office buildings, which panelists said will continue to be in demand as the large population of the Baby Boomers continues to age.
In the Richmond market, the grocery sector is becoming crowded with several new players, including Aldi, Lidl, Wegmans and Publix, building new stores, noted the panel’s moderator, Greg Gilligan, business editor for the Richmond Times-Dispatch. Will they all be able to survive?
“At some point it’s going to be oversaturated, and there will be winners and losers, and there will be consolidation,” responded Lamontagne.
He said his company is shying away from hospitality projects in terms of equity investments. “Where we are in the cycle … a one-night lease is a tough way to make a living in down market,” he said. “With hotels, we would focus on mezzanine financing.”
With major retailers such as Sears, J.C. Penney and Macy’s closing stores as online commerce continues to grow, Lamontagne predicts “the days of a city having three malls are coming to an end. It’s going to be more of a one-mall town, and those other malls are going to be redeveloped.’’
Neither Lingerfelt or Scott are ready to write off bricks and mortar retail. “Retail is at a crossroads,” said Lingerfelt. “In Nashville, we own a mall that was turned into a medical office mall. There are things that can be done.”
Scott said statistics show that high-end Saks Fifth Avenue has more online sales in markets where the company has a physical store. “You hear retailers talk about how it’s harder to reach customers now with advertising. Stores are a way to communicate their brand, so you need physical stores … I don’t think all stores are going away, and we’re going to buy everything online. “
As for multifamily, that sector was one of the hottest after the recession. Richmond has seen many apartments projects, especially in the downtown area. Will downtowns across America continue to see that trend?
“I think you will continue to see it if there’s demand. It’s been great for downtowns,” said Lingerfelt. “Yet, he thinks it will be a “relatively short-lived phenomenon. The millennials will age up, get married and have children, and they will look around and say, ‘We have to get out for schools or to have a bigger yard, to have a dog … ‘”
Lamontagne wasn’t so sure. He sees retirees ditching their larger suburban homes and yards and returning to cities to live in apartments. “I have older friends — people who have raised their kids in Connecticut — and they moving to Manhattan for the nice restaurants, the entertainment, and they don’t have to mow a law. I see people coming back later in life. I think the move to downtown locations is here to stay — maybe not the trend line we’re seeing today. But once people realize the walkable convenience, the public transit, the ease of living, I think they will grow some roots downtown.’’