The Forty Year Price Cycle of Commercial Real Estate

Forty years is a long time to pay attention. An hour is a long time to watch a snail cross a log. A year is a long time to watch a glacier advance or retreat. We pay attention to things that happen quickly – a building that burns, a car that crashes, a credit crisis, or a bank collapse. What escapes our notice are things that take place over years and decades.

Commercial real estate is dominated by four sectors: retail, office, multi-family, and industrial. Over the course of the past 40 years, each of these has flipped its position. Two that were in ascendance at the start are now in decline. Two that were in decline have taken on the two top spots.

Forty years ago, shopping malls were the symbols of our era. We didn’t build pyramids or cathedrals when we bult out biggest buildings. We built malls. Developing a mall was the way to build wealth in retail real estate. Today, malls struggle to draw shoppers. They re-invent themselves as something else – as medical offices and biotech labs. Some simply sit vacant.

Forty years ago, office towers were a corporation’s way of showing off its greatness. They were a city’s way of showing off that it was something important. Why else would someone build this cluster of towers? Any law or financial firm that wanted to be counted as a prominent member of its field needed a place in a tower with a view over the city. Today, those offices experience a major emptying out. The pace of construction of office buildings long ago slowed to a trickle. The only part of the office sector that is strong is the lab/office built for the bio sciences market. Most of the office buildings that we call “modern” are – you guessed it – forty or more years old. Office buildings, like retail, have flipped from ascendance to decline.

Forty years ago, apartment rents were low – too low to make new construction feasible. New multi-family construction was largely for a new market, the condominium, or for buildings where tenants’ rents were subsidized. Then, rents went on a long, slow, steady rise. Anyone who saw this for what it was – a wave – and got on board by investing saw the value of the apartment buildings they bought double and double and double again. In the 1960s, the “name of the game” in land development was to obtain a zoning change for your land from residential to commercial, because commercial, not residential, was where the money was. Today, the reverse is true. Developers acquire commercial sites and seek approval for multi-family development. At some point roughly 20 years ago, apartment rents had risen sufficiently that the value of a new apartment building, supported by these higher rents, exceeded the cost to build the building. Which made apartment construction profitable. Which has resulted in the building of Avalon Bay-style complexes all across Greater Boston. It is hard not to make money when you are charging $3,500 and up for a two-bedroom apartment. Apartments are in ascendance, where they were once in decline. Which brings us to industrials.

Forty years ago, industrials were a sad story. Their reason for being had gone south. All that labor-intensive industry had moved away. The big mill buildings of Lawrence and Lowell had long since become empty ghost buildings. Something similar but less intense happened to the one-story industrial building inventory from the 1950s and 1960s. Some one-story industrials in suburban parks found themselves converted to offices. Others simply sat vacant. Suburban industrial parks that had been laid out to provide their towns with a tax base sat wooded with trees and un-developed. Office buildings came in instead, but the construction of these ended, too, when their values fell to a level below construction costs. That moment came 30 years ago.

The thinking about industrials can be tracked in articles from The Reenstierna Associates’ Report over the decades:

• “Industrial Buildings,” Spring 1993
• “Industrials: the GIS Map,” Spring 1995
• “The Big Industrials,” Spring 1998
• “Industrials 2003,” Spring 2003
• “Industrials 2005,” Spring 2005
• “Workplaces in Decline,” Summer 2012

Then, five or eight years ago, the turnaround for industrials came. The change is described in other articles in this series –

• “Industrials 2018,” Spring, 2018
• “Industrial Revival,” Spring, 2022

For more about the current state of industrials in Greater Boston, the reader can refer to a companion article in this spring’s newsletter, “Industrials on Top.” Industrials are a topic that deserves attention. Their reversal, from deep decline to rapid ascendance, has been dramatic. Beyond that, we can say this: that the commercial real estate market has been cyclical. The last have become first, and the first have become last. All of us who are investors try to spot a wave. A trend. The trend is that every trend comes to an end. Investors who try to catch a wave after the wave has peaked may instead find themselves riding the wave not on its way up but on its way down.