28 Nov Analyst Insights: Industry Cycle
A few months ago, I attended a talk hosted by Bisnow “State of Montgomery County” and a conference hosted by IMN “U.S. Real Estate Opportunity & Private Funds Investing Forum”. It seemed that most investors were concerned about the rising cost of real estate. Many panelists spoke of where we are currently in the real estate cycle (https://www.crowdstreet.com/education/article/four-phases-real-estate-cycle/) and used the old baseball analogy of “what inning are we in?” The consensus is clear, we are in the later innings of the game or the “hyper supply” part of the cycle.
I had my own unique takeaway from these conversations. I think that these cycles are way too broad of a brush to paint with and cannot really be applied to current conditions. It is clear that developers are proceeding with extreme caution in terms of ground-up development. Instead, the flavor of the times is to reposition underutilized assets. Doing this doesn’t increase supply the same way a new building would. According to a quick CoStar search the 5- Year average for office space in Montgomery County (buildings above 10,000 SF) is 69.6 million SF. Currently, that number is only 70.3 Million SF. This 1% increase in supply doesn’t feel like “hyper supply”. Instead, repositioning assets and abandoning properties that served businesses of previous decades and creating more modern workspaces is occurring. This is creating more efficiency, not oversupply.
While my above statements apply to commercial office properties, I do believe that Multi-Family is likely in the “hyper supply” phase of the cycle. This product type has been the darling of the real estate industry for years now. In Silver Spring, MD there are currently 3,300 new residences planned for delivery (https://dc.urbanturf.com/articles/blog/the_over_3300_residences_slated_for_downtown_silver_spring/12858).
Maybe it is time to look at suburban office that has been neglected over the years and maybe it is time to sell multifamily assets.
Posted by Matt Brown, Acquisitions Analyst