One of the most entertaining parts about being a market participant is that there is always someone trying to call a top or bottom. The pundits are almost never right, but they’ve always got a call. And perhaps as importantly, they have a metric that they’ll hang their hat on to make that call. Being absolutely right is often not as important as getting the discussion started. As it pertains to the commercial real estate space, the metric du jour is sales volumes. This is far from a perfect metric, and it clearly ignores value of transacted properties, BUT, when it comes to picking bottoms, we’re not here to cast judgement.
That said, CRE is also no picnic from a cyclical perspective, as the main constituents of the sector have very little to do with each other. Comparing Industrial and Hospitality to Retail or Office seems insane right now. But volumes, especially on a backward-looking basis, would suggest strong fundamentals for the former and improving fundamentals for the latter. Multifamily is in some ways its own animal. Location, financing structures, and persistent demand have creates their own dynamics. But as for the others, we should probably be focused more on expectations for what comes next than we are on volumes.
As we look forward, Office space likely carries the greatest risk associated with uncertainty. Central business districts could conceivably never be the same, but we believe that the solution is a matter of timeframe. Many retail properties carry the risk associated with central business districts, but those that do not have been performing extremely well. Do we expect these two asset classes to improve over a longer time period? Of course, we do. This may even be the bottom. But what offset will “commercial real estate” see as a whole? Can we expect industrial and hospitality to continue their strong run? We certainly believe that industrial has strong demand drivers that could continue through changes in nearshoring and reshoring of manufacturing assets, but if the consumer is hurt by a recession, will they really keep spending on hospitality at the same rate they have been? Probably not.
So, if we’re wondering about where we are in the cycle, well, it clearly depends on the asset class, but at least by volumes, some things are finally starting to look up.