Commercial real estate professionals are optimists by nature, but we’ve been around long enough not to ignore what’s happening in the world just to stay upbeat.
With that in mind, please forgive us for sounding a bit dark as we channel the bear in us to explain how the psychology of a market – the way its participants feel and think about what’s going on – is an important component of making informed real estate decisions. Consider the following and ask yourself if your outlook for the future has changed in the last year.
For those of us who follow the economy and politics on a daily basis, it has become clear that news from around the world has become more negative. The steady stream of economic woe out of China, Europe and emerging economies around the world is difficult to ignore and impossible to deny. China is the world’s second largest economy and it manufactures a big chunk of the world’s goods.
For decades, this nation of over 1.4 billion people has been experiencing prolific growth, consuming a lion’s share of Earth’s raw materials in the process. However, that growth has slowed significantly, enough in fact, to send the world’s commodities markets into free fall. The impact on nations like Brazil, that are dependent on supplying China with those materials, has been brutal and government revenue shortfalls have forced more sovereign borrowing at ever-increasing rates.
The European Union has its troubles, as well.
Economic growth has stalled despite the European Central Bank’s drastic attempts to stimulate more activity. The Euro has weakened and debt levels throughout the union are soaring out of control. Greece is the most visible example, but its troubles reflect what is going on throughout Europe.
News here at home is not much better. US GDP growth is nearing stall speed. Preliminary estimates of Q4 growth go as low as .5%, and in the past two years, Q1 growth has either been negative or close to zero. Manufacturing has lost ground, retail sales are sluggish and our strong dollar is hurting the volume of our exports.
Inflation, once feared to be poised to run out of control, is so low that fears of deflation are on the rise here in the US, but even more so in Europe. If it occurs, we can all expect things to slow even further.
We could go on about one thing after another, but our point is made.
Bad news, however accurate it might be, changes the way people think and feel, and that ultimately changes the way they act and the decisions they make.
In the past several years, there has been a good deal of optimism from American businesses, and the metrics of commercial real estate have improved in a huge way. Vacancies are down from coast-to-coast, rents and sales prices have rebounded to levels beyond the previous market peak, and businesses large and small have been pulling the trigger on expansion out of the expectation of more good things to come.
That’s all good, but it is important to remember that all that action was based on psychology-based economic conditions that were far more optimistic than they are today.
So, the bigger and perhaps most important question is this:
How will today’s circumstances affect the collective psychology of American business leaders?
And how will the decisions they make be different going forward. We believe that many of them will shift to more defensive strategies, especially in terms of their facilities decisions, which tend to be long term decisions.
Some will sign longer leases, others shorter. Some will pay more for quality and the efficiencies that go with it, while others will look for a bargain to save on occupancy cost and put up with functional issues.
The point here is that changing one way or the other is not necessarily good or bad. It can be argued that the run-up in lease rates has been bad for business, as it has driven up the cost of occupancy.
But, that rate increase is the primary driver for development of new buildings that offer more value and greater efficiency to growing companies.
To be sure, things will be different going forward, and it will be up to each business leader to evaluate change and chart the best possible course of action accordingly. None of us can change what Brazil has to pay to raise money. Nor, can we tell the investors in the Chinese stock markets not to panic and sell all their stocks.
What we can do is stay informed, sort through all the facts and figures and decide which ones make a difference to us and which ones don’t.
None of us here at the Zehner/Davenport Industrial Group has a Ph.D in economics, but we do make an effort to follow events that we believe impact commercial real estate decisions, and we probably know more than most folks about commercial real estate in the markets we serve. Our goal is to help you make the most informed real estate decisions possible. Give us a call. We are here to help.