News

A Familiar Recovery Pattern With a Twist.

Conventional wisdom in the real estate industry says that in recoveries, apartments and hotels come back first, followed by retail, industrial and finally office. The thinking is as follows: Apartments are first, since demand can expand quite rapidly once renters and potential renters feel that it is economically safe to unbundle (for young adults to leave their parents, or for roommates to separate). Hotels also recover quickly, due to the virtually non-existent lag time between a return in consumer and business confidence and the booking of rooms. Retail is next, due to the fact that retail sales generally lead a recovery, and retailers are notoriously nimble in responding to any change in consumer demand. There is some lag time with industrial, due to factors such as: growth during the recession of under-utilized space, and reluctance among industrial users that were hard-hit by the economy to commit to new space until it is clear that the recession is over. These dynamics also apply to office users, only amplified by the lag between an economic recovery and hiring, as well as the high transaction costs and lead time associated with an office move. They are further intensified by the supply side: Office buildings generally take longer to build than apartments and industrial buildings, causing supply to come online long after a recession begins and vacancy rates to peak much later than they do for apartments or industrial. The question is: Does this conventional wisdom still apply in the recovery that is currently underway? The answer is yes.

Click here to view this article from its source.