Last week we came out swinging in our post about a recent shift in market sentiment.
We have seen the psychology of the market take on a decidedly defensive posture of late, and we believe market players are now taking actions that will soon manifest statistically by way of higher vacancy, reduced transaction velocity and, more than likely, lower prices for industrial space.
Why do we come straight out with those predictions without statistical proof? The answer is simple: stats are a lagging indicator. They tell us what happened, and are useful as predictive tools only when they’ve changed trajectory over time. For years, the local industrial market has been on fire. Hyper demand driven by cheap capital and severely limited supply has sent lease rates and sales prices to a level more than double the previous market peak.
However, now that borrowed money is no longer cheap and businesses are burdened with sharply higher operating costs across the board, our skepticism over the sustainability of the bull-run has ratcheted way up. More and more of our clients seem to agree, whether they be major institutional players or local owner/users. We see big investment deals get re-traded during escrow, lenders tightening their underwriting, developers backing off and interest from owner/user buyers decline as they have watched the interest rate for SBA 504 spike by 63% in just the past 5 months. The statistical impact of these shifts won’t take shape until later this year and into 2023 while the actual decision making is in the here and now.
This is why a proactive approach to managing real estate decisions is so important. Waiting for prices to fall before deciding to sell, could be a very expensive mistake. Likewise, holding out for a higher lease rate as the supply of similar product increases could end in lost rental income. As we recommended in last week’s post, if your building is for sale or lease, make it the next building in your market to go under contract. If you’ve been thinking about selling, but haven’t pulled the trigger, do it.
The foregoing observations take on even greater meaning when we look at the direction of the general economy. In Q1, the US Economy shrank by 1.6% according to the final estimate out of the Bureau of Economic Analysis. There is now widespread concern over the possibility that we fared even worse in Q2, which ended this past week. We will get the first official estimate of GDP growth on July 28th, but the Atlanta Fed’s GDPNow Nowcast, an algorithm that predicts economic growth in real-time, has Q2 GDP growth at -2.1%. If that proves even close to true on the 28th, our country has already entered a new recession.
If so, the psychology of the market will take an even more defensive turn, precipitate more defensive action and accelerate the statistical trends of higher vacancy, fewer transactions and lower prices. Add an increase in borrowing costs, a direct result of the Fed’s inflation-fighting policy and we’ve got a big problem on our hands that could take years to purge from the system.
They say those who claim to have a crystal ball are destined for a meal of ground glass. We don’t claim to have one, but we do have a bit of experience that tells us to warn you to keep your head on a swivel right now. Try to look at your strategy from an altitude that takes everything into account, including the time it takes for another real estate upcycle to run its course. We see too many people hang on just a bit too long because they want to avoid taxes or squeeze that last bit of juice out of a peaking market. Neither, in our experience, ends well for property owners who go that route. The big money goes to those who get out a little early and keep their newfound powder dry for great opportunities in the future.