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.

 

America’s Housing By the Numbers from Economic Focus

America's Housing By The Numbers

AMERICA'S 10 FASTEST GROWING METRO MARKETS

Metro Area Population %Gain New Residents
Austin, TX 1.9 million 2.6% 47,941
Houstion, TX 6.3 million 2.2% 127,782
Raleigh, NC 1.2 million 2.2% 26,012
Orlando, FL 2.3 million 2.0% 44,390
San Antonio, TX 2.3 million 1.9% 43,390
Denver, CO 2.7 million 1.9% 50,782
Nashville, TN 1.8 million 1.8% 31,153
Charlotte, NC 2.3 million 1.8% 40,368
Oklahoma City, OK1.3 million 1.7% 22,280
Sources: Census Bureau

AMERICA'S 10 STRONGEST HOUSING MARKETS IN 2014

Metro Area 4-yr Forecast Median Price
Bremerto, WA 44.7% $245,000
Bend, OR 33.6% $144,533
Detroit, MI 33.1% $51,000
Napa, CA 31.7% $355,000
Carson City, NV 31.6% $141,524
Panama City, FL 26.9% $158,669
Flagstaff, AZ 26.0% $278,000
Stanat Fe, NM 25.8% $187,601
Cheyenne, WY 23.7% $106,602
Anchorage, AK 20.0% $177,699
Sources: Fiserv Case-Shiller Indexes

AMERICA'S MARKETS ONCE HOT, GONE COLD

Metro Area 2013 Price Increase 2014 Projected
Las Vegas, NV 21.0% 5.0%
Riverside, CA 25.7% 5.0%
Sacramento, CA 17.0% 4.0%
Detroit, MI 16.0% 3.0%
Ft Lauderdale, FL 15.0% 4.2%
National Average 11.0% 4.2%
Sources: Trulia, CoreLogic

WHERE DEALS ARE BEING FOUND

Metro Area Investor Purchases 2014 Projected
01/2013 01/2014
Baton Rouge, LA 2.0% 16.0% 5.1%
McAllen, TX 3.0% 11.0% 5.3%
Cincinnati, OH 7.0% 12.0% 4.0%
Greensboro, NC 7.0% 12.0% 4.0%
Atlanta, GA 23.0% 25.0% 5.3%
Nat'l Average 8.0% 5.0% 4.2%
Sources: Realty Trac, CoreLogic

CCIM Tucson Forecast 2014

I was recently quoted for my attendance at the Southern Arizona CCIM Chapter 23rd Annual Forecast Meeting yesterday.

The whole article can be viewed here.

The event was well attended and had good information presented on the Tucson Market. I do believe my quote sums up the Tucson Market pretty well, "The Tucson Market appears to be four years behind Phoenix in the recovery."

Pigs Don’t Fly, But Chickens Do Come Home To Roost – by Neal Churney, CCIM

"Pigs don't fly, but chickens do come home to roost". Tucker Hart Adams, PhD. and Senior Partner with Summit Economics, LLC used this quote at CCIM's conference in Denver, Colorado to illustrate the point that there is no reason to believe that this time the economy will be different than any other time in history. Pigs will never fly and there is nothing anyone can do to change that. Economic crises have been and always will be determined by supply and demand not reaching equilibrium.

The second part of the quote, "chickens come home to roost", means that there is a natural order to the economy and there will always be consequences. Short-term trends do not predict long-term results but rather historical actions and data are the best indicators of what the future holds.

Whether the economy is booming or the sky is falling, it becomes easy to assume that a trend will continue indefinitely. For this reason, people continue to live in fear of losing their jobs, investors still keep money under their mattresses, and the public still worries whether Washington will ever resolve its differences.

Publicized revisions to projections such as employment, GDP growth, and inflation greatly affect confidence that an economic recovery is underway. Tucker further explained, "Pay attention to the direction of data revisions." If the revisions are being adjusted upward then it is good news for the economy. If the revisions are being adjusted downward then it means the economy has not fully recovered from the last cycle.

Several government sources, including the Bureau of Labor Statistics, are estimating that 150,000-200,000 new jobs will be created each month throughout 2013 and into 2014. This growth may help decrease the still higher than average nationwide unemployment rate (7.3% as of Nov 8, 2013).

Rail traffic was a final indicator mentioned at the conference as a way to determine whether the economy is truly recovering. A representative from the Federal Reserve office in Atlanta presented a statistic from the American Association of Railroads that rail traffic in the United States has been steadily increasing over the last 22 months. This indicates a continued increase in consumer spending and is often viewed as a good indicator of productivity and consumption.

Between 1953 and 2011 the average 10-year treasury yield was 6.57%. As of today, the 10-year treasury yield is approximately 2.75%. Even though most of the speakers at the CCIM conference were projecting only modest increases (approximately 50 basis points) in 2014, inevitably the 10-year yield will eventually "come home to roost" closer to the historical average. This means that now is still an excellent time to lock in long term fixed rate loans. Economic cycles happen; understanding where the station of the current cycle is the key to making the best decisions.

2013 IREM/CCIM Economic Forecast Recap by Nick Miner, CCIM – Part 2 Office Panel

Part 2:

Following the Industrial Panel was the Office Panel. Let's just say that they were in good spirits given the fact that the vacancy rate has dropped to 24.7% in the Valley. One of the panelist made a comment about the peak valley leasing rate on a full service basis was $35.75/SF. As of November 2012, that number was down to $25.75/SF.

For the West Valley Office Market, issues still remain that Corporate America is not locating out there. There are a lot of 2,500 to 10,000 SF user in the market, but no big occupiers of space like the CBD and East Valley.

Average tenant improvement costs are ranging from $40/SF to as high as $65/SF for Medical Office. Office condos are average about $50/SF for tenant improvements.

The panel believes that cap rates for Class A properties have compressed and cannot go any lower than what has been seen (6.5% range). Class B and C office properties cap rates are all over the board and largely dependent on the tenant mix and lease terms.

Medical, the bright spot of office, is "recession resistant, not recession proof" as quoted by Julie Johnson, CCIM. She also discussed medical cap rates for properties are around 7.5% and higher with properties on-campus being in the 7-7.5% range. There was further discussion that the traditional "hub & spoke" model of medical did not work any longer and that Primary Care is being purchased by Hospitals.

Part 3 tomorrow - Apartments and Retail!

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