The Winter of Our Discontent

For the past three months, the arrow has been pointing down on my Southern Nevada CRE Index, indicating a chilling of the economic climate in Southern Nevada since things ramped up a bit in mid-2011. While most measures still look pretty good when compared to one year ago, the index seems to be predicting at least one, maybe two quarters of lackluster performance for commercial real estate.

Looking at 3-month rolling averages in December on a year-over-year basis, we find the New Home Sales are flat (and disappointing), as is commercial occupancy (effectively flat since Jun 2010). All other measures show improvement year-over-year, with the biggest improvements being in the Gaming Revenue Index (3 point climb), New Residents Index (5 point climb) and Taxable Sales Index (7 point climb).

So, where are the jobs? Although the economy is moving now, it doesn’t appear to be hitting escape velocity. The Employment Index was up by one point, but remains in the same range it has been in since July of 2009. No major drop, but no real climb.

Of course, not all employment sectors are experiencing the same distress. On a year-over-year basis, the Financial Activities sector has taken over the top spot in job losses from Construction, which, by the way, is back to being a “job loser” after showing a little pickup in mid-2011. Wholesale and Manufacturing have also gone over to the dark side, leaving the immediate future of the industrial market looking gloomy. Retail is flat in terms of jobs – and this is a key sector, given how much the economy depends on consumer spending. Retail showed some improvement last year in terms of jobs, but the fourth quarter – the big holiday quarter – was flat, and that leaves 2012 in question. On the office side, the aforementioned trouble in the Financial Activities sector is evened out with job gains in Professional & Business Services and Health Care & Social Assistance. Office might not have too bad a quarter to kick off 2012, but it won’t be anything to write home about.

At the moment (and given how the numbers bounce around, "at the moment" is the best I can do prediction-wise), I predict a poor showing in the first quarter of 2012, with perhaps a slight improvement in the second quarter to give commercial real estate a fairly “meh” first half of 2012. While there has been some crowing over the “improving” job numbers nationally, the fact is that fewer people are working and incomes are not on the rise. Much of the nation’s success has been in the manufacturing sector from, believe it or not, exports. Given the fragile international economy and potential problems in Europe, China and Japan, a manufacturing export economy does not appear to provide a stable foundation for predicting good times ahead. The second half of 2012 may be an improvement over the first half, or it may be its identical twin. If you’re in the market to buy good properties and hold them, you’re probably okay. If you’re a landlord looking for a speedy resolution to your problems, you’re probably out of luck. If you’re a tenant, the market is still yours, and though a few properties have seen their asking rents rise, the majority are still struggling.