Four key elements shape commercial real estate cycles: economy, customer demand, supply, capital flows and valuations. This, according to panelists at I.CON: Trends and Forecasts, helps the commercial real estate industry learn from the past and prepare for the future.
Experience tells us that the four phases of a cycle – correction, recovery, expanding and peaking – have expanded time periods. Correction might take a single year; recovery is 2-3 years; expansion is 3-6 years; and peak is another single year.
How is this cycle different? New factors like e-commerce, urbanization and population migrations, service expectations, climbing inventory ratios, the price of oil, high levels of education and the lack of labor, and the uncertain future of retail are converging and leaving a surge of transformation in their wake.
Let’s look at a few of the trends our experts are seeing today:
- When it comes to speculative development, will industrial overbuild? Perhaps not; The spread between build-to-suit and speculative construction is stable moving forward and smaller than it’s been in past market cycles, which indicates a balance. The big box industrial is always a viable asset since it is typically less expensive to build and continually in demand.
- E-commerce is driving growth – nearly half of all deals above 250,000 square feet in 2015 were for e-commerce projects. Amazon.com Inc. accounts for 45 percent of all online sales and continues to widen the gap with all retailers. Of the top 10 global online players, six are from Asia. Our panelists say it’s only in the second inning – and we haven’t seen anything yet.
- Population shifts are enabled by technology and prosperity, and exurbs are growing faster than the urban core again. After the recession, growth in the most urban counties of metro areas surpassed that of the exurbs. New building types depends on expected service level or urbanization – 95 percent of the population can be reached with a two-day delivery.
- Any prior cycle has been impacted by the free flow of information, but today’s open media and constant connectivity could have an effect on the difference between an investment cycle and a demand cycle.