Wednesday, May 18, 2011

Commercial real estate and test cricket

That is my current analogy of how the market is performing right now. Why? After looking at this and other similar deals.

In test cricket you play it safe for the long haul. The game is five days long with, typically, two full turns of batting and fielding. (Yes, I am over-simplifying cricket. It isn't the easiest game to understand for us Americans, after all.) So batters tend to try to hit balls that will get them one and two runs, with anything more being gravy. That is what buying a building at a 6-cap is: safe and long-haul.

There are shorter forms of cricket that have become increasingly popular, such as one day games or even three hour formats, known as 20/20 cricket. Here the emphasis is on taking risk and hitting for fours (you score four by hitting the ball to the boundary of the field) and sixes (for hitting beyond the boundary). These deals are still in the works, because they are riskier and harder to underwrite and many institutional investors are, well, okay with singles right now.

The problem is: until the riskier development ideals start getting done again, you have a construction market that is, in a word, moribund. When those workers are back on the job the economy will, in my opinion, improve. Without it? More of the same. There is a lot of space that is vacant, but that is sometimes a function of location and lack of demand at those locations. For instance, are you going to build in the exurbs or in the heart of the city? Fortunately, people are hearing whispers of deals quietly being inked and negotiated, and perhaps next week's ICSC conference in Las Vegas and this week's ULI meeting in Phoenix will give us a little more intelligence on those types of deals.