Timing the commercial real estate and development market is much the same as trying to time the stock market, or timing interest rates or housing values; many people try to do it- and most do it poorly. Commercial construction activity is in some ways like the overall economy; there are so many factors which can lead to an upswing or a crash. The best answer is “nobody knows,” but, regardless, certain trends or markers are evident. Here we will attempt to point out where commercial construction is headed next year and in 2020.
Historically most bear and bull markets, including real estate, run in cycles—usually at seven to 10 year intervals. As for commercial construction spending specifically, according to the Federal Reserve Bank of St. Louis (FRED), we are currently at the end of a seven-year uptick in non-residential construction spending, nationally. (cp. https://fred.stlouisfed.org/series/TLNRESCONS )
Commercial real estate clearly mimics in several ways the overall strength of corporate profits and stock prices. Anyone with a 401k plan is aware that the S&P 500 is running on a nine-year bull market, dating back to 2009. Many money managers are ringing the alarm bells.
Though a bit complex and obtuse, many argue that there is a strong correlation between the housing market and commercial development and commercial real estate (CRE) in general. Some say that commercial real estate (RE) is a laggard to housing, which may be the case. During this seven-year strong period of commercial construction spending we have also been in a housing bull market.
However, just in the past five to six months there has been evidence of a marked slowdown in housing prices and general housing demand. If commercial lags behind housing by six to 12 months, would we then be entering a commercial slowdown soon?
Key Industry Personnel Insights
Charts and data point aside, it is well worth noting estimates of some industry insiders—including some folks not normally polled about the topic.
One example would be the construction/bridge loan niche. Bryan Joyce of Grand Coast Capital believes that more risk exposure is imminent for himself and for other development backers and investors.
“My personal prediction is that we will see a slowdown in commercial construction in late 2019/early 2020. I believe the residential market will slow down sooner than that. I feel the rising interest rates and rising material costs will be the cause of the eventual slowdown, but these factors are still being absorbed by strong demand in the market.”
Joyce believes that both the residential and commercial development market are due for a correction. “We’re factoring that into how high we will go on the capital stack to get a loan closed,” he says. “We feel that, in today’s market, we may not always compete on Loan-to-Value (LTV) ratios, but it will protect us in the (eventual) downturn so that we’re in a strong position to be ready for the next upswing.”
Kenneth J. Van Liew, CEO at Global Real Estate Strategies based in the NYC region, runs a real estate development and management firm.
“Our projections are aligned with 2018-19 office space statistics,” says Van Liew, “which indicate the most commercial square feet of office space hitting the market of any two-year period since 1985-87. Within five years, more than 22 million square feet will hit the market, forcing demands to lower asking rents. My opinion relative to these estimates, are that rental rates for commercial have stabilized with brokers positioning to offer incentive lease rates and options to attract long term tenants.”
Van Liew sees a drastic slowdown in commercial development that will leave developers with consideration to renovate versus new construction. He notes: “We believe that lease rates may drop substantially up to 25% to incentivized deals for tenants to bite. We see this impact reaching the market in 3rd quarter 2020.”
Bob Lambert (no relation), Vice President of SnapDragon, doesn’t see any slowdown until a minor hiccup during the election season of late 2020. SnapDragon is a recruiting firm focusing on the East Coast, filling positions in the Building Materials sector and supply chain.
“Activity and hiring today is very strong, still at a very high level,” Bob states. “I was just at a national conference and the economist presenting claimed that he didn’t see a significant slowdown in construction until sometime in 2022. One key factor is that many of the indicators which prefaced the 2008 crash are not apparent currently.”
Real Estate Groups/ Sentiment Polling
According to a consortium called the “Real Estate Roundtable,” their comments from early November include:
“Our latest Sentiment Index finds commercial real estate industry leaders experiencing continued positive market conditions and cautiously predicting solid performance into 2019. Concerns exist about interest rate and construction cost increases, as well as labor shortages. However, these concerns have not yet caused significant market disruption,”.
Headlines from Wolf Commercial Real Estate in August suggest a positive gain in 2019:
“Spending on hotel, office, distribution, and other commercial and public buildings likely will expand for an unprecedented ninth-consecutive year in 2019, according to a consensus forecast by the country’s top industry economists (including: AIA, ABC, & Dodge Data & Analytics).”
More Questions than Answers?
From the limited research and outreach noted above, it appears that the commercial construction and commercial real estate groups and associations believe there is no slowdown anticipated for 2019, without commenting on 2020.
Other industry experts/insiders quoted herein believe that 2020 will be a year where we will see a relevant slowdown in construction activity, yet 2019 seems fairly solid.
Lastly, related market data points and cycles would seem to indicate that a significant commercial crash (a larger than 10% drop) is imminent in 2019, or 2020 at the latest.
The hope is that the underlying fundamentals allow a rather quick relapse, so that we are not stuck in our tracks for four to five years. It is also critical to determine if we will lose 10% or 50%, or somewhere in between. Most companies can handle a 10% or 15% slowdown and revenue loss; very few can survive a 50% hit.
Smart, innovative, and resourceful construction firms will be able to weather any upcoming concerns. But some in the industry may not make it through—much like the aftermath of 2008/2009.
Ken Lambert has been heavily involved in construction, sales, real estate, and as an advocate for mental health for more than 25 years. He holds a U.S. Patent for a type of loan software program, and is an established writer, consultant and speaker in several fields. He has written for both secular and religious publishers, including a book he co-wrote entitled “Top Ten Most Influential Christians since the Apostles.”