Robert Grunnah: The Most Dangerous Four- (or Five-) Letter Words in Real Estate

Robert Grunnah
Robert Grunnah

You know most of them. They are offensive and can redirect any conversation. We all have varying degrees of tolerance for offensiveness, and we all know offenders who will  drop the “F” Bomb with such frequency one becomes immune. I know others who believe “Heck” promises a hot resting place. It comes down to different communication styles and personalities.

To me, the most  dangerous and over-utilized four- (or five-) letter word is “still.” Get into a discussion with your peers about the immediate DFW commercial or residential real estate, and you hear it more frequently than a negative opinion on  Greg Hardy.

Title Companies: “Yup, had a record year in 2015 and 2016 is ‘still’ good.”

Brokers: “Uh huh, had my best year ever last year, and this year is ‘still’ dang active.”

Lawyers: “Yeah, got to sue more people in 2015 than ever, and 2016 ‘still’ looks more litigious.”

Builders: “Oh yes, built more Uptown units in one year than the three years before. Don’t want to own them, just presell, and 2016 ‘still’ has more buyers.”

“Still” started creeping into prognosticating seer’s presentations early last year and now just seems to be a common adverb, although it is becoming more of an adjective. The Oil and Gas  folks were hearing it in 2012-13. They are hearing it again, but in the negative sense, the prices are “still” very low.

As an adverb, “still” is defined as “up to this point or that time; as yet to occur.” The use of the word at the end of a statement implies a pending change. We heard it a lot in 2007 and again in 2008 when, frankly, “Holy F-bomb” would have been more accurate and better reflected the actual five-year future for the CRE and RRE markets.

I’m certainly not making a similar forecast for 2016 or even 2017. But, not so much for the usual defenses one hears for a sustained growth. After all, our market “still” remains strong.

Yes, we have enormous job and population growth, which appears not just as the driver, but also the economic savior to support continued glutinous absorption of land for new construction into the foreseeable future. We all recognize that activity can’t go on forever—never has before—just as down cycles have a limited term as well. There has never been a last “CRE/RRE cycle.”

An active, robust economy produces good jobs, good pay, and high occupancies, such as we have seen the last three years. This has produced record compressed capitalization rates at levels not inversely seen since my Great Depression (I986-1990). “Holy F-Bomb, Batman, UDF,” it has produced record sales values for land and buildings, unlike levels we have ever experienced. But I digress.

Like all cycles, each is unique. This, too, will evolve. We have never seen such rapid escalations in CRE pricing, and the local paper reports monthly on home-price increases. We, also, have never seen so much investment cash sitting on the sidelines awaiting the evolution in order to advantageously acquire at reasonable prices.

Should this cycle slow to a point that buyers become sellers, and it will,  the strong sophisticated dynamics of our DFW market will support a rapid stabilization at some reasonably readjusted level. As soon as pricing becomes attractive to local investors who remain sufficiently capitalized to act, unlike most other national markets, our recovery will be a bit painful, but tolerable in pursuit of the next boom. The lowest  level to which it must retract, and when, will be anyone’s guess. That is when the ultimate game of chess begins and the cycle repeats itself. Novus expects it will have the opening move sooner rather than later.

What will result will be a healthy repricing to a level justifiable by the then current economy.

Although most of the current large-ticket transactions are being fueled with institutional money, which has a need to generate cash flow to support its existence, and will be temporary for some, it appears there is little concern for cost-per-square-foot reality in exchange for immediate cash flow.

This is all well and good in an expanding, healthy economy. Our observation, however, is that patient, sophisticated investors are getting more value participating in property types that will generate far better returns by betting on the strong growth projections for DFW over the long term.

Yet, as long as I’m “still” here and the market is “still” good, most investors will continue to support current yield over long-term growth.

It’s worth noting that sometimes the main difference between a “visionary” and a broke developer/investor frequently is just “timing.” Still.

Robert Grunnah is “still” selling land at overvalued prices. Training others to do so as well has been his gift of mentorship. Contact him at [email protected]

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