Commercial Investment Real Estate September/October 2019 | Page 12

MARKET
FORECAST
Preparing for a
Cooling Economy
Leverage your real estate portfolio for an eventual
downturn in the market.
A
lthough the sting of 2008 may not register for some
of today’s workforce, many clearly recall the excesses
leading up to the Great Recession. To mitigate risk
related to a corporate real estate portfolio, leaders must
identify shifts in economic conditions and deliver spaces (and
experiences) that appeal to tenants and their employees.
As David Shulman, UCLA’s senior economist, notes in his arti-
cle, “The Goldilocks Economy,” an inflection point exists that is
neither too hot nor too cold, where inflation and recession seem to
be in check. Before recession looms, however, it’s important to out-
line a long-range, scenario-based planning and investment strategy
for commercial real estate to provide for the best and worst of times.
5 Ideas for Planning Ahead
1. Look at the balance sheet. The healthier a business, the more
resilient it will be in a downturn. Could an economic down-
turn present an opportunity to invest in people, spaces, or
technology related to operational efficiencies and employee
effectiveness? Yes. Understanding long-term organizational
objectives (cost-cutting and growth strategies, for example)
will help CRE professionals advise investors or clients in
decision-making.
2. Follow emerging trends. A joint publication by the Urban
Land Institute and PwC identified that the market is sensing
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September | October 2019
a slowdown in the real estate marketplace in 2020. The rea-
son? Rising costs for land, financing, and construction. Office
development and investment prospects ranked toward the bot-
tom of the six property types. The demand for more logistics
(warehouse) space is one outlier, thanks to the Amazon effect.
3. Keep an eye on construction costs. Many general contractors
report business in specific growth markets is robust, with a
backlog of projects stretching into 2023. That backlog helps
drive prices for real estate because contractors can be more selec-
tive about bidding on projects. The primary challenge, however,
still revolves around skilled labor and project management.
“The next three years look really bright,” says Jon Dandurand,
vice president of JE Dunn Construction, based in Kansas City,
Mo. “We’re finally starting to see technology catch up with out-
dated means and methods in construction. Even with a down-
turn, the war for talent will only continue, meaning the invest-
ments corporations make in their real estate will be that much
more important.”
4. Assess the rental marketplace. “Rental markets have remained
strong as rate increases persist,” explains Renae Bradshaw, vice
president for tenant representation at JLL. “To incentivize ten-
ants, landlords are offering richer concessions in abatement and
tenant improvement capital. Last year’s 12 percent increase in
construction costs also provided a challenge to tenants. We are
COMMERCIAL INVESTMENT REAL ESTATE
by Christopher LaPata, MCR