Arizona Economy in a Recession?

Here is an interesting article about the Arizona Economy and if we are in a recession or not. Here are a few interesting facts from that article:
Is Arizona in a recession?
No one can say for sure, but because of these symptoms, economists say it probably is in one:
• Job growth has been stagnant or declining every month for five months now. The Arizona Department of Commerce predicts a 0.5 percent decline in non-farm jobs this year.
• Retail sales have declined 9.5 percent since peaking in December 2006.
• The Arizona Business Conditions Index, a survey of purchasing managers, fell below 50 every month from January through March but did rise to 52.2 in April. Indexes below 50 indicate a contraction in the economy.
• Claims for unemployment insurance have increased every month since September 2006.
Sources: Arizona Department of Commerce, W.P. Carey School of Business at Arizona State University, Eller College of Management at the University of Arizona, U.S. Bureau of Labor Statistics.

How is this going to play into the commercial real estate market? It will obviously have a negative impact, the only question is how negative? And then a follow up, how long will it last?

CRE is a hindsight business. We really won't be able to know for sure how to answer the questions above until next year. I will make a forecast that it is not nearly as bad as the media portrays. There are businesses still expanding and moving into our market and when a new business moves in it fuels the demand for more retail, housing, medical offices, etc.

ICSC ReCon Convention in Las Vegas - Status of the Retail Market

My partners and I attended the ICSC conference in Las Vegas. The expectation was one of potential "doom & gloom" because of the credit market mess.

To say the least, it appears that this was not the case. The meetings I had with owners and developers were definitely more positive then expected. Most people understand that commercial property is a long term investment. Sales and leasing activity has slowed, but it when you try to compare it to one of the busiest years ever, everything is going to seem slow. On the macro scale, there are signs of softening across the board. However, every person I spoke to that was out of state were still commenting on wanting to get into the Phoenix Market.

I overheard some comments about how people felt that it didn't seem as busy this year compared to last year. What most people were forgetting is that they actually expanded the amount of floor area for the convention! Final numbers haven't come in yet, but at the convention they were estimating over 45,000 people. That is a lot considering the whole focus of this convention was on retail properties.

Understanding the many market reports that are sent out

Many of my clients receive market reports from various sources. Each report seems to be just a little different then the other one and it can create some confusion when looking at the information.

One example, I was reading the May 2008 Western Real Estate Business periodical and there were some market statistics providing a snapshot of Phoenix MSA. When looking at such reports, before you really look at the numbers, you should make sure you read the footnotes of what they count or do not count for their market statistics. In those footnotes explains the real message in the report.

The challenge with CRE is not everyone in the business uses the same terms the same way and their is no perfect way of measuring CRE. CRE is not something that can be "day traded" like stock. CRE is site specific.

A couple of good examples:
rentable square feet (RSF) vs. useable square feet (USF) vs. gross leasable area (GLA)
NNN vs Absolute NNN vs MG vs IG vs Gross vs Full Service

Regarding some of the big brokerage firms report, they are only going to report on the properties that they target for leasing/sale/management assignments. The information is good, statistically speaking, but it generally will only capture approx. 80% of the market.

If you solely rely on a third party reporting company (such as RERC or Costar), they typically can only report on what has happened. This is really good information but you still need a qualified commercial broker to take that information and apply it to your submarket or specific property.

Where is the commercial real estate market heading?

My reply is simple; commercial real estate (CRE) is a long term hold. The days of a rapid appreciation in value are over for this cycle. CRE has a cycle like all industries. Many experts believe that the peak was reached in 2005/2006.

However, there are still opportunities in this market. Cash is more important. I hate using cliches but we are nearing the point of "cash is king."

Another point to consider, timing. Because CRE is a long term investment and the thought of buying today and selling tomorrow does not work for this industry should not keep investors sitting on the sidelines when there is a well located property. While CRE is a long term investment, the reason to buy now cash on cash returns is money that you see in the bank on monthly basis. It's not uncommon to look for a 10% cash on cash return and then when you factor in depreciation and equity buildup the real return is much higher!

Now is the time to make sure you have the right leasing and management team in place and operate the property to its full potential. That is how you will reap the benefits of your investment in CRE.