The Supply/Demand Equilibrium


Len O’Donnell
President & CEO

Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

Mark Fitzgerald
Senior Director, Research

May 2017

Why CRE Concerns have been Greatly Exaggerated

From newspaper outlets to on-air pundits, skepticism appears to be brewing as the commercial real estate (CRE) cycle approaches its later stages. A recent Financial Times article warned of a post-crisis construction surge, suggesting developers might already have built too much real estate.1 Banking regulators have signaled “a caution light,” insisting lenders do more to mitigate their exposure.2 Even Federal Reserve Chair Yellen has weighed in, indicating prices are “high” in a recent address regarding the U.S. economic outlook.3 These are certainly all valid issues investors should evaluate in the proper context, but much of this criticism appears to ignore one distinct point: the CRE market is decidedly different today than it was leading up to the Global Financial Crisis (GFC). This is not to say that the current market is without risk, but at the very least, there is more to the story.


Today’s real estate market has arguably been undersupplied with respect to new construction, which is in sharp contrast to the period leading up to the previous peak. While supply growth in the office sector has increased substantially in both 2015 and 2016 (60M square feet annually), this was barely half the average annual amount between 2004 and 2008. Retail construction completions have averaged 46M square feet per year since 2010 — down from 160M square feet annually in the decade leading up to 2008 — a decline of more than 70%. A portion of the retail decline is certainly attributable to e-commerce, which has bolstered industrial sector demand. Consequently, industrial completions have been relatively strong; delivering 150M square feet annually over the last 3 years, but this is still 20% less than the same period leading up to the previous peak. The multifamily sector is the only major property type that has consistently outpaced pre-recession supply levels across major MSAs (metropolitan statistical areas), it has been supported by an unprecedented growth in demand (see Exhibit 1).