Is Overbuilding a Threat?

Comments by:Andy DeckasChief Investment Officer Opus Corp.Minneapolis

So, is overbuilding a threat? Yes, say 67% of respondents to last week’s Feedback Poll, but don’t bite your nails waiting for the return of the see-through building. It’s only 14% who believe overbuilding will hit straight across the board–in all sectors and markets. The majority say it will be a spotted phenomenon–cursing certain sectors only. By the way, an optimistic 19% say it won’t be a problem at all. Commentator Deckas weighs in on the side of the realistic 67. Here’s why.:

“The key was the response that mentioned certain sectors and markets. We’re active in more than 35 markets and just about all the main property types, and the one people worry about the most is housing. There are several markets–the notable ones, Florida and Vegas–that probably are already overbuilt.

“Does it worry me long term? No. In housing, we like the long-term prospects. It has gotten a bit overheated and there have been frenzied sellouts and presale success, and that’s cyclical. It certainly doesn’t mean you can’t be successfully in a normal market without that frenzy. But we are taking a bit of a breather. We’re delivering the condos we stared and not starting as many. But long term we still like it.

“Shifting gears to office, the opposite is true. There’s been negligible new supply. Some markets might be a bit different, and there is a bit more activity on the coasts, but generally speaking there’s been negligible new spec office in the past several years. We as a company are building spec office in almost every market where we’re active. Our strategy always has been to look at trends, and we try to be the first in the game. Sometimes we’re the first out too, and we might leave a couple of opportunities on the table. I’m not worried at all about office.

“You have a little more supply that’s been delivered in industrial. You might find a market or two that’s overbuilt, but generally speaking there’s just a little more supply. Keep in mind that industrial is easier and faster to do so there are more people playing that game. What’s interesting though is that the demand prospects are still excellent and you’ve seen capital markets interested in industrial–often times without the prerequisite leasing that historically they’ve needed. This is because entitlements are tougher and more arduous to accomplish nowadays. Costs have clearly come up, so even partially leased or even empty buildings still sell in the capital markets at phenomenal pricing. From their perspective it’s a matter of taking in a little leasing risk and factoring in a bit of carry, versus taking as much as three years to get entitled and build in an escalating cost environment. Those opportunities still look very attractive to them.

“In retail, you might have some empty inline space, but you typically don’t embark on a major retail project unless you have it significantly preleased. It’s hard to overbuild, although you could certainly saturate a market.

In all, we all hear the same numbers about the US population. We just hit 300 million, and in the next 20 years we’re going to be adding the current population of France to the US. Those people need to live, shop and go to school somewhere. Those are down-the-middle positive trends for real estate.”