• Tue. Jun 21st, 2022

In my world of commercial real estate there is a lot of cash for too few transactions


Bill Norton

Mid-July and things are buzzing – not going back to pre-pandemic levels, but getting there. We are unlikely to return 100%. COVID is a game changer – working from home being the biggest change. I’m skeptical that large cohorts will insist on working from home. We (homo sapiens) are social animals. A recent Washington Post article said that 83% of CEOs want their employees to return full time, but only 10% of workers want to return full time! IBM just leased 150,000 s / f from Crosspoint (formerly Wang Towers in Lowell, Mass.). They consolidate 16 smaller local offices. The answer is somewhere in the middle – I guess 70-75% are back in the office at least 3-4 days a week.

One concept, called “hospitality”, is the sharing of an office or workspace. It is a “hybrid” where workers can be in the office on certain days (probably on a certain schedule) and work from home on other days. This would reduce the weekly commute time, but also make it easier to collaborate, build teams, etc. Some managers think they can reduce the number of desks and desks and reduce their office footprint. But I think back to immediately after September 11, no one ever went to work above the third floor again! It lasted about nine months. Again, after the Great Recession, in less than two years, the offices were full. Frankly, there is a lot to the old saying ‘out of sight, out of mind’. My daughter works remotely here in New Hampshire for her job in Washington, DC. She misses her colleagues, but (there is always a but), she likes the ease of turning on the computer at 8:55 am without taking the subway for 45 minutes.

In adversity, there is an opportunity. The opportunity for American employers and workers is to reconsider what “work” is, how productivity is measured and how it should be paid. I have been independent for over 30 years. I set my own schedule. I am a sociable person and thrive in face to face interactions and “live” negotiations. I have adapted to Zoom and MS Teams, but I don’t like it. It makes sense for a lot of things, but it is insufficient because one size does not fit all.

Another article (from Bloomberg) states “Expect post-pandemic productivity increases!” Productivity is likely to be unstable over the next year ”. For every action there is an equal and opposite reaction. Thus, we should expect a significant rebound and momentum for a few years after the pandemic. Or should we? First, are we post-pandemic? The delta variant, lower vaccination rates, reluctance to wear masks, outbreaks around the world… All of this indicates that we are not out of the woods yet. Second, the economy is spinning in large part because of billions of dollars in stimulus, even though a large chunk of the appropriate dollars has not been spent, there are still billions (versus billions) left. As Fed Chairman Jerome Powell said on 60 Minutes a few months ago, no one knows exactly how much “bounce or lift” a trillion dollars is making us these days!

In my world of commercial real estate, there is a lot of cash (excess cash) for too few transactions. We’ve all heard of the sizzling residential markets, but we also see some of this crossover with commercial properties. This is especially true for large “industrial” and multi-family bays. Even the retail trade is adapting to new uses. I just read an article on converting a Bloomingdale to 1,100 self-storage units! Low interest rates lower the cap rates (desired rates of return), thus raising prices. On top of that, construction costs are hyper-escalating, leading people to think they should buy existing buildings. With over 40 years in the business, it looks like a “bubble”. But having gone through five real estate ‘cycles’, I can’t predict when things will turn around.

A home broker friend emailed me saying that she had just listed a house identical to mine for $ 525,000, but would probably sell for between $ 550,000 and $ 560,000. My answer was – so where would I go ???? You cannot sell high and buy low in the same market …

So, we should take advantage of this immediate period of optimism, go out, eat, shop, even travel (I’m flying to Denver next week to visit my son). Headwinds or clouds on the horizon are a resurgence of COVID (in one form or another), the ongoing resentment and partisan fighting in Concord and Washington, and the rift between the rich and the working-class. None of these are a silver bullet – all three are heavy hitters simultaneously.

It appears that the prices of most building materials (and labor) have peaked. This is a good sign because construction, renovation and DIY are a big chunk of our economy. If / when it freezes, it will be a major drag on the global economy. Almost all of those recent overheated sales carry mortgages, most of which require two incomes – lose one of those incomes – even for six months – and things start to fall apart. Leverage (debt) is good in moderation and a hard lesson when overdoing it. Enjoy the summer, even while we are recharging the water tables!

Bill Norton, CRE, FMA, Hon AIA NH is President and Founder of Norton Asset Management, Inc., Manchester, NH


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