Recession Watch For Retail, Office, Industrial And Land In 2017
Real estate folks in DFW have likely been sleeping easy for the last several months as the cycle reached new superlatives. Beyond the record absorption, occupancy and deliveries, there are some potential threats to keep an eye on. We took key takeaways from the Weitzman Annual Forecast, NTCAR's 2017 Broker Forecast and ULI's Annual Emerging Trends Forecast to prep you for potential weaknesses in DFW CRE.
Weitzman reported retail occupancy of 92.6% in retail centers with more than 25k SF. CBRE's Karla Smith reported retail occupancy at 94.5%. Whichever stat you choose, retail in DFW is stronger than it's been in decades. Weitzman executive managing director Bob Young assured attendees of the Weitzman Annual Forecast that demand is strong and he sees no signs of overbuilding.
Occupancy looks strong across the board, but the average may not be the best indicator of success. Young said some some centers with much higher vacancy will never be more leased without renovations or capital improvements, and that product is skewing the data downward.
Swearingen CFO/managing principal Bruce Hecht says absorption isn't the best metric for office growth in DFW anymore, thanks to all the build-to-suit projects in the pipeline. Continued corporate relocations, expansions and small business growth look likely for 2017, even if estimates of Trump's prediction of GDP growth of 4% turn out to be too liberal.
But there's a potential portent of slowdown: "We've never done as many sale-leasebacks as we did in '16, which is usually indicative of the top of a cycle," Hecht said at NTCAR's 2017 Broker Forecast last week.
All the drivers needed for a solid industrial market remain in place in DFW. Collectively, Dallas, Atlanta and Chicago accounted for one-third of all 2016 industrial deliveries, according to JLL. Both Q2 and Q3 data in 2016 show a full pipeline, strong pre-leasing around 18% or higher, and healthy absorption.
But the world is witnessing a once-in-a-generation shift in how we buy goods, CBRE SVP Steve Berger (a NTCAR Stemmons Service Finalist) said. Capital becoming cautious about investing gives Berger pause about where we are in the cycle.
With 32,000 home starts in 2016 and about that many in '17, the velocity of land sales will remain steady. The explosive population growth, especially in the northern suburbs of Dallas, drives developers to move fast, and labor shortages and construction costs can stall delivery dates.
Local government can have rigid views of what they want developers to build, making a developer's vision more challenging to achieve without city government support, Younger Partners' Tom Grunnah (formerly of Novus, before its merging with YP) said. Price remains the most sensitive subject for the land market. "If we price land too high, every subsequent cost feels more pressure," Grunnah said. "We can't get too greedy and price ourselves out of the market."
PwC partner and chair of ULI's emerging trends report Mitch Roschelle warns of three factors that could cause a recession. First, the shrinking labor market as Baby Boomers retire could put the economy in turmoil. Second, skills such as coding and tech services that the U.S. lacks relative to other countries could cause a recession if the nation isn't able to compete for skilled labor. Lastly, the affordability crisis hasn't lessened. With home prices up, wages staying stagnant and the U.S. forming more new households than it has added supply, many people are wondering how to pay rent and mortgages.