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 hadÂ Dr. Barry AsmusÂ 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. PerspectiveÂ 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 prices are starting to rise.
Currently, the Phoenix Metro is has about a 6% vacancy. Cap rates have been ranging in the mid 5s for single-tenant, investment grade properties. Multi-tenant has been in the low 7s to high 6s for cap rate. Price points are between $70-80/SF whereas replacement is running $120/SFÂ 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.Â It has been over 8 years since an office has been built fully spec.
“Creative office is a fad; but is really not.Â 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.
IREM/CCIM Economic Forecast foreshadows good times – AZ Big Media