Commercial Real Estate & Business News – February 6, 2018

Apartment rents might not be headed upward with the same kind of energy they did in recent years, but there's still upward momentum in the vast majority of U.S. markets. RentCafé recently reported that 89 percent of the nation's biggest cities (the top 250 by population) saw rents grow year over year in January, while only 2 percent experienced rent drops...»
Nearly three-quarters (74%) of mortgage bankers expect to see no downturn in the multifamily lending space this year, saying deal volume will either increase from or remain the same as in 2017. That's according to Berkadia's first Powerhouse Poll, which surveyed nearly 150 of the firm's investment sales brokers and mortgage bankers across 60 offices to assess 2018 opportunities in the multifamily space...»
Today's employment report from the Bureau of Labor Statistics shows growth in both public and private construction spending, according to an analysis by Associated Builders and Contractors (ABC). Construction added 36,000 net new jobs in January, an impressive increase of 0.5 percent on a month-over-month basis. During the past 12 months, construction has added 226,000 net new jobs...»
The average profits for people selling their homes recently hit a 10-year high. During the last three months of last year, ATTOM Data Solutions found the average home price was $54,000 more than what the seller had paid. In metro Phoenix, the average home price gain was $63,000, a 36 percent return on investment, according to ATTOM's research...»
Could Millennials be holding metro Phoenix's new home market back from finally recovering? Most of this huge generation of young adults haven't bought homes yet, and the Valley's home-building market still hasn't recovered from the crash. Housing market watchers, including myself, have been a bit obsessed with where and how Millennials, born between the early 1980s and 2000s, live...»

Commercial Real Estate & Business News – February 5, 2018

Another month, another solid jobs report. The pace of job growth has slowed somewhat over the last two years, but the economy is still adding jobs at about 2 million a year - a solid figure at a time when the unemployment rate is so low. January marks the 88th straight month of job growth, the longest such streak on record...»

The push is on to bring the NFL Super Bowl to Arizona for a fourth time. The National Football League has Super Bowls slated for 2019 through 2022 with games in Atlanta, Miami, Tampa and a new stadium being built in Los Angeles...»

The Phoenix Rising FC soccer team wants to build a new Major League Soccer stadium on the Salt River Pima Maricopa Indian Community land. Phoenix Rising already plays in a temporary 6,200-seat stadium on the Salt River reservation near McClintock Road and Loop 202...»

Arizona State University unveiled preliminary plans this week for a $160 million renovation of Wells Fargo Arena with an adjacent indoor sports complex to house men's hockey, wrestling and gymnastics...»

Nonresidential construction spending expanded 0.8 percent in December, totaling $720.4 billion on a seasonally adjusted basis, according to Associated Builders and Contractors' (ABC) analysis of data released today by the U.S. Census Bureau. This represents the fifth consecutive month during which the pace of nonresidential spending has increased...»

Commercial Real Estate & Business News – February 2, 2018 Inc. (Nasdaq: AMZN) is now the largest industrial real estate tenant in the Phoenix regional market as e-commerce led by the Seattle-based giant becomes a bigger and bigger part of the U.S. economy. Mike Petrivelli, CoStar's regional research analyst, said Amazon now occupies close to 5 million square feet of industrial space in the Phoenix market...»
A luxury Scottsdale apartment complex near the Waterfront has sold for a record $210.4 million. Optima Sonoran Village, on Camelback Road and 68th Street across from Scottsdale Fashion Square, was purchased by Des Moines-based Principal Real Estate on Tuesday, according to public real estate records. Rents run as high as $4,000 a month for the 592 apartments built in 2013...»
Few retail real estate insiders were surprised to hear that Toys 'R' Us will close 180 stores in the U.S., especially after the retailer weathered a disappointing holiday shopping season, following a bankruptcy filing in September 2017. As power center landlords grapple with how they will fill the closing Toys 'R' Us and Babies 'R' Us locations, some experts say the number of targeted stores is an encouraging sign...»
Fannie Mae's Delegated Underwriting and Servicing (DUS) program had a record year in 2017, providing more than $67 billion in financing and supporting over 750,000 units of multifamily housing. "[2017 marked] our 30th anniversary of DUS, a platform that relies on shared risk and strong lender partnerships to serve the needs of the rental housing market," said Jeffery Hayward...»
The Winter/Spring 2018 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey reflects the favorable changes to the commercial real estate (CRE) market caused by the recent federal tax overhaul. The tax bill is expected to increase the rate of return on CRE and makes investment more attractive. Survey participants predict that it will cause moderate though uneven growth...»

CCIM|IREM Economic Forecast 2018 – Summary of Insights

CCIM|IREM Economic Forecast 2018 – Summary of Insights

This annual event is a great way to get insight into the local commercial real estate market.  Each year for over the past 10 years the Central AZ CCIM Chapter and local IREM Chapter are able to get the local experts from each commercial real estate product type to discuss what happened the previous year, any trends they are seeing and what they anticipate will happen for the current year and beyond.  All that occurs after a keynote speaker that generally discusses the macro-economic climate.

For this year, we had Dr. Barry Asmus as our keynote speaker.  I had the wonderful privilege to introduce Barry.  I have been blessed to hear him on several different occasions and each time his ability to take macro events down to a practical application never disappoint.  Here are a couple of highlights from his presentation:

-US Economy in 2017 ran at 90% of debt + taxes of GDP (historically this would be 30-50%).  Comparatively speaking, Japan is running 250% of GDP!

-It takes approximately 6 billion hours each year to file tax returns in the US

-There was 5 decades (30s, 40s, 50s, 60s, and 70s) where the marginal tax rate was +/- 70% which produced very low economic growth

-Ronald Regan changed the marginal tax rate in 1982 and lowered it from 70% to 50% to 28%
-1980 – 2000 S&P averaged 12.5% return
-1980 -2000 DJI averaged a 12.4% return

-The new Tax Law change that just passed is going to be unbelievably exciting for everyone

-It is estimated there is going to be somewhere around $2-6 trillion of cash repatriated back to the US economy because of the lower corporate tax rate.

Turning to the current national debt; Barry said we won the lottery to the tune of almost $50 trillion!  How, by the US economy turning into a net energy exporter of natural gas!  The US is poised to produce 10M barrels/day which will may the US the number 1 producer in the world.  Perspective – There is 3.5 million square miles in the US; the federal government owns approximately 1.5 million square miles.  The estimated value of the natural gas is roughly $50 trillion today.

Barry ended with the statement of the free market + fossil fuels + freedom will allow the US economy to continue to lead the way and the world.


Industrial Panel Discussion
Moderator: Pete Bolton
Panelists: Pat Feeney, David Krumwiede, Will Strong, and Leroy Breinholt

Overall tone was positive.  There is lots of momentum locally and we are starting to see speculative construction.  Some key takeways are that new spec construction for e-commerce tenants are now looking for minimum of 40’ clear heights.

The owner/user market (6-30K SF user) is very active right now.  The inventory is low and pricings are starting to rise.

Currently, the Phoenix Metro is has about a 6% vacancy.  Cap rates have been ranging in the mid 5’s for single-tenant, investment grade properties.  Multi-tenant has been in the low 7’s to high 6’s for cap rate.  Price points are between $70-80/SF whereas replacement is running $120/SF – further showing the room for growth in pricing.

Manufacturing has been increasing as well.  MFG relies on rail served properties.  In 2016 there were approximately 6 deals; 2017 5 deals and so far in 2018 there are already 3 in the works.

Biggest hurdles are the trades.  It was stated the average age for a senior journeyman mason is 51.  The lack of the trades being available for construction and tenant improvements is going to really drive pricing up significantly over the next several years.

Office Panel Discussion
Moderator: Scott Fey, CCIM
Panelists: Molly Ryan Carson, Barry Gabel Marina Hammersmith, and Mark Seale

We have seen rental rates increase approximately 3.5% year over year as a whole.  Cap rates for Class A CBO in 2017 ranged from 5.8-6.2%; suburban is from 6-6.75%.

From development standpoint, it was a good year.  “Intelligent building” has been the statement used and referenced as a point that there hasn’t been a lot of speculative development.  It has been over 8 years since an office has been built fully spec.

“Creative office is a fad; but is really not.  It is here to stay.” – Barry Gabel in discussions about the how it was thought the creative office wouldn’t be a long term strategy.

Traditional office tenants are focused on meeting spaces, tenant lounges, collaborative spaces.

Healthcare is still using the Hub & Spoke model for space and patient delivery of services.  It helps to on reducing cost as more and more physicians continue to get squeezed on the reimbursements.  Institutional investors like HTA and Ventas are still active and acquiring more properties.  Healthcare follows rooftops (just like Retail!).

CA is always a great opportunity for AZ.  They are seeing more and more of the operations moving to Phoenix and that trend should continue.

There are now 758 tech related companies in Phoenix and that number is continually growing.

“Sustainers” are the infrastructure and the livability drivers for office demand.

Right now, ASU needs at least 500K SF in downtown Phoenix.  ASU is going to move the International School to downtown Phoenix.  The first grocery store is going to be opening soon.  This will be the last piece of the puzzle to have downtown Phoenix truly become a 24/7 downtown.


Retail Panel Discussion
Moderator: Pat McGinley
Panelists: Walt Brown, Jr., Michael Hackett, and Rommie Mojahed

The fear of the retail-apocalypse is….over-hyped.  That is the sentiment of the panel.  Even though 8.5% of all retail sales were internet based, there is still demand for the bicks-n-sticks.  Some of the biggest challenges is the adjusting for densities for new projects.  Local municipalities need to understand that Phoenix has some of the most sophisticated retail developers in the nation and understand what works together better than the local municipalities.

Most of the shop space today is being filled with the “internet proof” type of tenant, such as dentists, chiropractors, nail salons, etc.  It has really turned to “daily needs” that are truly successful.  Mixing multiple uses and developments is the what is demanded and being built.

A lot of centers are either “have or have not” centers.  Plus there is a big disconnect between perception and reality.

Operationally, the co-tenancy clauses in leases are more and more necessary to understand given the box disruption that continues to occur.

Cap rates for core grocery anchored centers are between 5-6%; power centers are between 7.5-10%.  If it is a B/C center, they are seeing more 8%+ cap rates.

2017 had 4,000 net store openings overall.  Occupancies are up, rental rates are increasing and all signs are pointing to more strength than weakness in this sector.

Apartment Panel Discussion
Moderator: Jodi Sheahan
Panelists: Scott Cook, Cliff David and Josh Hartmann

As everyone anticipated, it is a hot market.  There are over 1,100 complexes over 100+ units in the market.  In 2016 there were 156 sales, 2017 142 sales and 2018 should be a consistent 10% of inventory trading.  Overall rent growth was about 4% with vacancy rate around 5%.

Cybersecurity is a big threat since they keep PII (Personal ID Info).  Other big concerns are the maintenance/labor costs.  It is becoming more and more expensive each year.  One panelist suggested that there needed to be a video game “Call of Plumbing” vs “Call of Duty” to get more people interested in the trades.

No real big changes on the development, tenant expectation for amenities.  Very common for a “Tech package” in CA and starting to see that more and more in AZ.  Developers are always balancing the “what’s hot today” and what can “be delivered in 2 years” to make sure they don’t pursue a fad.  Privacy and high speed connectivity are still the biggest drivers right now.

New projects are not just seeing Millennials.  It is a good mix of Gen X and Boomers.  Flexibility is a big factor as well as sustainability.

When asked if they would accept Bitcoins as a rent payment in the future, all panelist agreed it was doubtful because of the slow adoption in the industry…but it could happen.


Commercial Real Estate & Business News – January 31, 2018

Nikola Motor Co. has picked Arizona for a $1 billion, 2,000-job manufacturing plant and will also move its research and development and headquarters operations to Buckeye. The plant will be west of Phoenix and sit on 500 acres. Nikola will make hydrogen-electric semi-trucks at the planned Arizona facility. Nikola is now based in Salt Lake City...»
LOS ANGELES-December's enactment of the tax reform package buoyed investor sentiment toward commercial real estate and contributed to a favorable lending environment, CBRE said Tuesday. The latest CBRE Lending Momentum Index, which showed a slight quarterly decline for the last three months of 2017, nonetheless also reflected more balanced participation among lender classes...»
Irwin G. Pasternack AIA + Associates PC and Pasternack Properties have broken ground on TEN Distribution Center 1, a Class A industrial building representing the first 1.1-million square feet in the planned $300 million, more than 3.6-million-square-foot TEN Distribution Center industrial park, located on 83rd Avenue near the confluence of Interstate 10 and the Loop 101 in Phoenix...»
The announcement from Toys R Us last week that it will initially be closing up to 182 stores by April could end up being a positive for many of the landlords impacted. A significant, if not majority, of the properties are located in strong retail trade areas with attractive shopping demographics. In addition, retail properties near or in the shopping centers with stores slated for closure...»
The numbers for 2017 are in: It appears the holiday shopping season was a success. But will this translate to a revival for bricks-and-mortar retail in 2018? The short answer is that it depends. That was the message during real estate services firm Cushman & Wakefield's recent webinar on the topic, hosted by Garrick Brown, head of retail research for the Americas...»
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