1. Were there any surprises in commercial real estate in 2019?
Contrary to all of the industry discussion about a downturn, KBS hasn’t seen this happening among our assets. In fact, it’s quite the opposite, we’ve seen a ramping up of activity, and 2019 was one of the strongest leasing years in our firm’s history in terms of absorption, length of leases, and stable to growing rents within the portfolio. We expect this to continue at least through next year.
Another surprise that has generated a lot of industry buzz is the rapid devaluation of WeWork. While co-working may only account for approximately three to four percent of the overall market, it’s important for property owners to evaluate the specific market demand surrounding the shared space provider on a more regional level.
For example, at KBS, we are always carefully evaluating the local dynamics of each market, each asset, and the surrounding demographics in the area to ensure that our co-working partners will perform well and support strong growth within each property.
What’s also interesting is that there’s been a lack of conversion of public REITs to private REITs – similar to what Blackstone did with EOP in 2007. Since non-traded REITs are trading at 15% to 25% less of their net asset values it’s surprising more haven’t converted. One segment that’s performing well that we haven’t entered into yet is the growth in the NAV market. KBS is closely evaluating the NAV space and plans to enter into it when the time is right.
2. Explain how KBS might handle a recession/downturn and/or a continued slow growth trend?
We’re not seeing a near-term recession, but even if there is a slowdown, we have positioned our portfolio to help manage the complications of a recession. well. Our portfolios are geographically diversified, the tenants in our buildings and in our overall portfolio are diversified across industries, and that our debt is diversified, incorporating both fixed and floating rates.
We’ve had a lot of success in renewing and extending leases for some of our biggest tenants and we think that’s a good sign. However, we are not limiting ourselves from capitalizing on continued rent growth if it becomes apparent there is still significant runway left in the cycle.
Regardless, we take a conservative approach to our investment strategies to ensure that our assets can weather any storms over the long term.
On a broader scale, the CRE industry is better prepared for a downturn today than it was in the past. Except for a few markets, we are seeing less new development than past cycles, and we don’t believe there’s overleveraging going on like there was in the last downturn – it appears owners and lenders are much more restrained in this cycle.
Interestingly, the CRE market has already weathered a few small slowdowns during the course of this 10- or 11-year post-Great Recession recovery. In 2013, there was a bit of an economic slowdown; and in late 2015/early 2016, we saw a more significant slowdown where CRE prices dropped approximately 10% across the board. We continued to buy through those down cycles, and those assets have performed extremely well since.
KBS sees these slowdowns as market corrections that actually serve to strengthen the industry and prevent a serious recession from occurring, extending the longevity of the overall economic cycle. We anticipate a market slowdown, but not necessarily a recession.
3. What opportunities and potential pitfalls do you see for 2020?
We see continued opportunity in tenant and investor flight to secondary markets with growth potential. This would include markets like Raleigh, Nashville, Portland, Austin, Denver and Salt Lake City, which have a well-educated workforce, robust employment, strong transportation infrastructure, major universities and a high quality of life. KBS has been active in those markets for the past five years and will continue to do so.
While some see tariffs as a pitfall, tariffs are not necessarily impacting what we do. We find labor shortage to be the What’s most impactful for us – the difficulty of finding quality labor for construction projects, the low availability of labor and the increase in costs associated with it. We will continue to monitor the labor shortage and follow a strategy that allows us to complete construction work on properties as needed to provide the highest-quality office environments possible for our tenants and the strongest returns possiblefor our investors.
Despite the talk of recessionary conditions, the veteran CRE executive is optimistic there are simple but necessary market corrections that will strengthen the industry and allay the onset of a more serious economic downturn. Moreover, Richerson maintains that KBS will continue to pursue opportunities in secondary markets where growth is being fueled by a myriad of promising factors. KBS is dedicated to following a strategy that strives to exceed investor expectations, while cultivating prime office communities for its tenants.
Rod Richerson is regional president, Western United State for KBS, one of the largest owners of premier commercial real estate in the nation.
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