A real estate cycle coming to an end under relatively benign macroeconomic conditions?
That’s something that Richard Barkham, chief economist and global head of research of commercial real estate services firm CBRE, said he has not seen in his 30 years in real estate.
It is a dynamic that led Barkham to call for a soft landing even amid high interest rates.
During a mid-year economic outlook on June 19 at the National Association of Real Estate Editors Annual Real Estate Journalism Conference, Barkham pointed to what he called “remarkable circumstances” that have helped along the high interest rate environment.
The first circumstance has been the variety of robust government stimulus packages that the U.S. has seen since the COVID-19 pandemic from both President Joe Biden and former President Donald Trump. The stimulus level is only eclipsed by what was pumped into the economy during World War II.
Barkham said it seems the general perception is that government stimulus will ebb soon. However, the projects tied to the Infrastructure Investment and Jobs Act will continue to roll out for years to come.
Other factors he points to include a decade of deleveraging that has left consumers in good shape and, for better or for worse, a shortage of single-family homes that has also kept the economy going.
There continues to be a lack of labor supply, running counter to a high demand for labor, and the Federal Reserve Bank has its work cut out to continue to curb inflation.
How do these soft-landing conditions tie into real estate?
The sector is seeing many of the classic conditions of the end of a cycle, Barkham said.
That includes stalled capital markets. Investment volume is subdued, falling to 2013 levels by dollar amount.
CBRE, which is based in Dallas, predicts capitalization rates — a measure of a property based on the operating income of a property divided by its value — will peak in 2024.
Prices are drifting downwards, and cap rates are drifting out, Barkham said.
“We think that will stabilize and start moving by the year end, but that depends a little bit on when those first interest rate cuts come,” he said.
What is different from a traditional cycle-end is that demand continues to hold up.
There continues to be a standoff between buyers and sellers, which emerged in 2023 as deal volume began to peter out.
The cost of capital is elevated, especially as it pertains to debt.
Investors have capital they would like to deploy, but they want to buy at more advantageous rates to lean into future growth and in an environment that could compensate them for the cost of capital. That means they require lower prices than what exists in the market today.
Sellers, however, aren’t under any particular financial stress at the moment. They know rate cuts are coming, and believe there will be value recovery to be had.
“There’s not much in it, but it’s enough to stall transactions,” Barkham said.
On the office leasing side, Barkham said CBRE continues to broker the same number of deals, but companies require less space than they did five years ago.
The office sector also factors deeply into the end-of-cycle conversation as well.
Barkham said a cycle’s end typically correlates with investment liquidity drying up, along with a surge in vacancies.
While a rise in vacancies isn’t occurring, investment liquidity is — especially for new office development.
With the emphasis on flight-to-quality for businesses, that means there won’t be enough of the right kinds of office spaces in the coming years for tenants.
The trend is reflected in Dallas. Much of the forthcoming office space in and around Uptown Dallas — from the Goldman Sachs campus to Parkside Uptown to 23Springs — is already spoken for.
Barkham added unemployment is not going up, but vacancy across asset classes is, though it will get absorbed given the benign macroeconomic conditions.
“It’s a period of pause and reflection in real estate, but there is no doom loop taking place,” said Barkham.
