Behind the Grim Faces Of Real Estate Professionals

February 25, 2008 - Whether you’re looking at the bottom line, numbers of property tours and proposals, or simply the looks on the faces of commercial real estate professionals today, things are noticeably different compared to 2006. That was, by most accounts, the peak of this most recent real estate cycle, which we all enjoyed. I believe there were some who thought the good times would not end, but as is the case in this business, the cycle repeats.

The slowdown is likely to affect all areas of the economy about equally. I do not think we will go into a recession locally, but I think growth will be minimal.

The good news, however, is that this too — this sluggish market — shall pass. The real estate business is cyclical, and generally, those who are patient find success.

Patience. It seems comical to talk about after the wild ride we have just taken. The activity in the market was amazing. Properties, companies, tenants, even chief executives, and billions of dollars were changing hands at an incredible pace, sometimes multiple times within weeks. Capital was flowing relentlessly, and it seemed that every day brought another too-good-to-be-true success story of flips: condos, office buildings or entire portfolios. In most cases, significant profit was realized, and it all happened very quickly. There was no time to be patient. Many firms and investors found success playing the game of hot potato; there are, however, those who may be getting a little burned since the music has apparently stopped.

The days of relying strictly on declining interest rates for big investment returns are over. We are back to the basics of creating value and higher returns through operating efficiencies, level of service and building enhancements.

Cycles are a reality in the real estate business. I think a way to guard against the inevitable downturn is to avoid over-leveraging, overbuilding and overconfidence. When the high times give way to a slower pace, don’t overreact.

Regarding investment sales, we are now seeing a calming affect. Every property on the market gets considerable interest from buyers — and yes, there are still buyers — but the once-voracious appetites seem to be tempered. Perhaps a factor in this calming is the amount of capital that is on the sidelines. Haste has yielded to patience and a wait-and-see approach. An important exception is the foreign capital that is entering the U.S. real estate market and Washington in particular.

From a leasing perspective, the velocity of transactions, tours and prospective tenants is not what it was 15 months ago. There is a combination of factors to which we attribute this change, including a general uneasiness in corporate America.

Some key Washington industries are moving beyond the peaks of their cycles as well. The federal government — the largest office user and biggest spender in our region — is less active than in recent years. Preparation for a change of administration and a continued focus on war spending mean that we should not expect an increase in leasing activity for the next year and a half or so. Another major sector is the law firms. The top 100 firms in the Washington area, collectively, have had a local requirement of an average of 1 million square feet of office space each year, based on expiring leases and expansions. This year, however, the requirement for square footage is significantly below average, and data show that it will remain below average for the next three years. And generally, the psychology of the credit crunch seems to be affecting real estate decision makers as plans for expansion or upgraded office space are being moved to the back burner. There are simply fewer tenants in the market.

That said, the fundamentals of the commercial leasing market are healthy. Rents in Class A office space in Washington continue to climb as vacancy rates remain the lowest in the country. The supply and demand balance appears healthy.

It is true that we don’t know how long this part of the real estate cycle will last and exactly where the lowest point will be, but having been in the business for more than 35 years, I can tell you that this looks very familiar. I might be on my third or fourth cycle of the Washington commercial real estate market. The ride is never dull, but a cycle it is. Be patient.

John E. “Chip” Akridge is chairman of the District-based commercial real estate firm Akridge.

Behind the Grim Faces Of Real Estate Pros
John E. Akridge III | Washington Post