“There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy.”
Hamlet could have been speaking to us. We live in strange times, good times for all aspects of commercial real estate.
But the up cycle we’re enjoying is unlike any we’ve ever experienced. There are forces at play that are unique to the times, and challenge each of us to respond in different ways. Indeed, these are good times, redefined, brought into high-definition, so to speak, in three areas directly impacting our business: the nature of opportunity, the oddity of our economy and the growing threat of terrorism.
From the property management front, I can report that the industry is better, stronger than it ever was. The market continues to grow, both on the multifamily and commercial side. Rents are still going up, demand is increasing and supply is coming down, and all bode well for the market.
And here is the first point of departure from previous up cycles. Demand is coming for new product and from a new demographic, forcing us as business people to redefine how we look at opportunity and where new strategic growth will come from.
There’s a different product emerging in many cities, especially older MSAs, where adaptive re-use is leading to the conversion of older (largely) industrial facilities into hip new residences. There’s a reengineering of that space and those locations.
As our Central Business Districts (CBDs) redefine themselves, so too do our suburbs, where we see transit-oriented developments springing up to create town centers—virtually self-contained environments. The CBD and suburban trends support a growing movement toward live-work-play lifestyles. And this means redefining our clientele. Much of this new activity is being fueled by the Millennial generation, many just starting out in their careers and for whom home ownership is still an eventual goal, if it is a goal at all. As a class of renters, they think differently and have different needs than previous generations, forcing property managers to recognize and respond to a new set of expectations.
Boston is a perfect example of the trend, where we’re still redeveloping our waterfront, traditionally occupied by manufacturing and industrial properties, to attract tourists, businesses and residents. So, both in the core and on the outskirts of our nation’s cities, there are still new, great opportunities for growth.
New development and redevelopment could not take place without a strong economy. But even here, it is an economy unlike we’ve seen before. Slow to show itself, the first two years of the up cycle produced few jobs, seemingly taking years to rev up to full recovery, and now that we are here, economists are starting to speak of downturns. They say the economy takes some kind of turn every seven or eight years, and we are definitely due for that.
Still, you can look for more growth in 2016. Rents will still go up, the job market will become stronger and the good times will continue. At Simon, we’ve budgeted a 3 percent to 5 percent rental increase across our diversified portfolio, not a bad increase from a landlord’s perspective.
My forecast for 2017 is a bit more cautious. Our first, long-awaited interest rate hike is now officially behind us, and at a quarter of a point, it hardly moves the needle. But as rates continue to rise through 2016, consumer confidence is sure to react, again redefining the good times. We will have to watch 2017 carefully.
But while the signs of our cyclical economy are trackable, the timing of another terrorist attack is not, and this threat also redefines our good times.
The bare fact is that we are all living under the cloud of that threat, and, 15 years in, it has become a sort of background to our lives, with the potential to undo both the opportunity I spoke of and the economy itself. There’s always the reality that something might happen at one of our properties.
As a result, we must continually re-orient the way we look at safety and security and spend capital accordingly. There are a lot of sophisticated upgrades being done to our properties to make them as secure as we can. From a bottom line perspective, it certainly has impacted our operating costs. While rents are increasing by single digits, our security costs have increased by double digits. And yet, unfortunately, we know it can never be totally safe and secure.
And despite this inability to achieve total safety, I would offer that any manager who has not addressed the issue of ramped-up security is already behind the eight ball.
These are the issues that form the backdrop against which we will be doing business in 2016. And, despite the threats and barring any unforeseen surprises, it will be a good period from a real estate management standpoint. We can all look forward to a year of good times, redefined.
With more than 30 years of property management experience, Chris Mellen, CPM, is 2016 president of the Institute of Real Estate Management. Mellen is also vice president of property management for the Boston-based Simon Companies, supervising the day-to-day operations of all properties in the firm’s portfolio.