Steve Crosson

The forecasting of commercial real estate performance has historically focused primarily on supply in the supply-demand equation. Prior to the mid-1990s, there was some logic in so doing, as downturns were typically caused by excessive capital, which led to ruinous overbuilding. The tacit assumption was that demand levels would continue at least at current levels and would probably increase.

Since the mid-1990s, the emergence of securitization and publicly-traded REITs has brought greater discipline in the development of new space. There have, of course, been notable exceptions, most recently high-rise residential in Miami and Las Vegas, as well as large residential subdivisions throughout the United States. Since the collapse of technology stocks in 2001, it has become clear that sharp contraction in demand, rather than overbuilding, is the greater contributor to commercial property distress.

The causes of the recent downdraft were two-fold. First, sharp decreases in demand were precipitated by declines in virtually all sectors of local, regional, national, and international economies. Secondly, pricing of commercial real estate became insupportably high, as investors failed to properly price risk in acquisition decisions. Broadly speaking, overbuilding was not a cause.

Investors buying to hold for the intermediate and long term would benefit by anticipating periodic decreases in demand in their forecasts. Analysis of the current cyclical phase in the context of historical cyclical behavior can be quite useful. Linear demand projections will almost certainly lead to disappointing results.

Steve Crosson is chairman and CEO of Crosson Dannis Inc., which provides real estate appraisal and consultation services. He also serves as chairman and editor in chief of The Appraiser Journal.