Economy Watch: CRE Losing Some Steam?

UCLA Anderson Forecast's senior economist discusses the signs of a slowdown and which sectors are more at risk than others.
David Shulman

David Shulman

“These are heady times for commercial real estate,” began UCLA Anderson Forecast Senior Economist David Shulman in his latest monthly letter about real estate, which was released recently. He ticked off the reasons: cheap money; low levels of new construction (except for apartments); and only modestly improving demand. As a result, CRE values have more than doubled from their financial-crisis lows of 2009. Heady indeed.

On the other hand, hints of a slowdown loom. “Prices are leveling off as investors have become concerned that the period of extraordinarily low interest rates may soon be coming to an end,” he explained. “In addition, job growth—the source of much real estate demand—will inevitably slow as the economy approaches full employment. At the same time, supply will pick up as more construction is completed in 2017 and 2018.”

The letter also featured comments about various property types. The office sector, Shulman said, has seen a sluggish recovery, in part because “technological disruption is obviating the need for physical file space and reference rooms, and a shift to open floor plans is reducing the square footage needed per employee… This trend is far from running its course.”

Malls are suffering, and many may close by 2020 as anchor department stores fold in the next few years. “Thus far, grocery-oriented shopping centers have been immune to the impact of e-commerce, but with Amazon moving into the private-label grocery business and attempting same-day deliveries, convenience-oriented retail may soon be disrupted as well.”

Industrial real estate, by contrast, is benefiting from e-commerce; Goods still have to be shipped. “E-commerce is warehouse intensive, and as the need to shorten delivery times has increased, the demand for close-in modern warehouses in major population centers has soared,” the letter noted.

As for apartments, the darling of the recovery, the sector might soon prove to be top-heavy with high-end units. “Apartment owners may soon discover there might not be enough tenants to support $3,500-a-month rent for one-bedroom units,” Shulman said. “The apartment business now appears to be in transition from great to good.”