Wednesday, January 16, 2013

Gazing in the Crystal Ball for 2013

I'm going to start posting some excerpts from the Q4-2012 reports on this blog, but first decided I'd do a little forecasting with the CRE Recovery Index.

In general, 2012 had a decent close for office and retail, though industrial (and specifically warehouse/distribution) continued to show weakness, and in fact took a step back in 2012. While predictions for economic growth (national) in 2013 vary widely, few economists seem to think 2013 is going to be especially strong - perhaps better than 2012, but not stellar.

The CRE Recovery Index would seem to support that supposition for early 2013, as it hit a three month plateau and then dropped slightly in November. In all, 2012 showed steadier growth than 2011, which was a real roller coaster. A depressed index in late 2012 points to a depressed first half (or at least first quarter) in commercial real estate.

In November, the index components worked out as follows:

New Home Sales: +7 Y-O-Y - new home sales are showing a definite improvement in Southern Nevada, hitting a level we haven't seen since early 2009. They still have a really long way to go, but any positive movement here is welcome.

Commercial Occupancy: +1 Y-O-Y - it took a long time to get this index to move, but strong net absorption numbers in the retail and office markets finally got commercial occupancy to increase by a click in August 2012. These numbers are quarterly, and the fourth quarter saw no movement over the third quarter.

Visitor Volume: +0 Y-O-Y - visitor volume in Southern Nevada, despite being flat in November on a year-over-year basis, was in record territory in 2012.

Gaming Revenue: +1 Y-O-Y - in general, gaming revenue has not been as strong as visitor volume - more people, but less gambling - but it is showing recovery from the depths of the recession.

New Residents: +6 Y-O-Y - this is probably the more important index to watch. Many would hold that construction was the second pillar of Southern Nevada's economy, but they're only partially correct. Migration was the second pillar of our economy, with construction being a very visible component of migration into the Valley. People are once again coming to our balmy shores (okay, we don't have shores, but you know what I mean), and that should go a long way to helping the local economy to recover.

Employment: +1 Y-O-Y - employment has been only marginally better in 2012 than 2011 and 2010. The hospitality sector posted strong job gains in the early part of 2012, but has now settled back down. Government is hiring again (take that whichever way you want), as is the health services sector (though it isn't translating into increased demand for medical office space), while construction and financial services are still the big losers. In terms of local CRE health, new residents is phase one, new jobs is phase two. We're seeing movement in phase one, so we will hopefully see phase two light up in 2013.

Taxable Sales: +5 Y-O-Y - taxable sales is the other big mover for Southern Nevada in 2012. The taxable sales index went from an average of 79 in 2010, to an average of 83 in 2011 to 2012's average of 88. Definite progress, and probably why the retail sector is showing signs of being the first sector to post real, solid recovery in the market.

Port Traffic: -6 Y-O-Y - port traffic in Los Angeles is a minor part of the index, and overall is stronger than it was before the recession.

All in all, look for a slow start to 2013, with retail probably showing the most resilience. The office market did well in late 2012, but employment growth in office sectors is marginal and I frankly don't trust it. Outside of warehouse/distribution, industrial is doing well - it will unfortunately probably do more of the same in early 2013.
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