tag:blogger.com,1999:blog-14854715306823458682024-03-04T21:59:35.374-08:00Vegas CRE InsiderJohn Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.comBlogger60125tag:blogger.com,1999:blog-1485471530682345868.post-87856584509793428272016-05-27T08:35:00.000-07:002016-05-27T08:35:16.112-07:00Son of Boom<div class="separator" style="clear: both; text-align: center;">
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On the cusp of Southern Nevada’s economy returning to form – i.e. the Recovery Index is almost back to its 2005 level, it might be a good idea to examine the economy we’ve built over the past 10 years. The “Son of Vegas Boom” is a different cat than the “Vegas Boom”, and there are pros and cons to what we have become.<br />
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The recovery index above tells the tale. It shows numerous measures of the local economy, comparing their year-over-year performance. These indices compare current performance to an arbitrary date in the past, in this case January 2005. You can read the current level as a percent of the level in 2005.<br />
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On the positive side, we see Gaming Revenue, Employment, Taxable Sales and LA Port Traffic are all better than they were a decade ago (though not by much). Commercial Occupancy and Visitor Volume are nearly there. The takeaway – Southern Nevada’s gaming business is doing well. People are back to work and locals and visitors are spending money.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR3e6hQH1E5M6epghFoZH9-EKBkap4BMl_yb-jDvDGKSIMDVFMxAynnacdbDSlLv8X1uT905jesHpAp0opnVsMVKVeVm9QPZEeRE1xXTnh0JfwMHY4IxwTqkFbdXgOskmlmQk0qeQenx4/s1600/ElectricMeter_ColliersInternational_JohnMStater.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="285" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR3e6hQH1E5M6epghFoZH9-EKBkap4BMl_yb-jDvDGKSIMDVFMxAynnacdbDSlLv8X1uT905jesHpAp0opnVsMVKVeVm9QPZEeRE1xXTnh0JfwMHY4IxwTqkFbdXgOskmlmQk0qeQenx4/s400/ElectricMeter_ColliersInternational_JohnMStater.png" width="400" /></a></div>
Two measures are well below where they were a decade ago – New Home Sales and, the driver of the home sales, In-Migration. In-Migration here is actually the out-of-state drivers licenses turned in at the local DMV. It suggests that Southern Nevada is no longer growing at the rate we used to. This population explosion was a key driver of the construction sector in Southern Nevada, one of the two pillars (with gaming) of the old economy.<br />
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Electric meter hook-ups tell a similar story of slower growth, and construction jobs, while they have in recent months shown improvement, remain well below boom levels.<br />
This leads us to the two problems with the new economy. First and foremost, our eggs are truly all in one basket now – hospitality. We also can no longer rely on population growth to get us out of national (or global recessions). In the good old days, hundreds of new incomes coming to the valley every month created a buffer for Southern Nevada in times of recession – that buffer is effectively gone.<br />
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That means that when the next recession hits – likely within the next one to three years – Southern Nevada can expect to experience it in much the same way as the rest of the country (or planet). Keep this in mind as you advise clients in terms of expected return on investment properties, assuming they plan to hold them for fewer than four or five years, and on tenant renewals.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-43482548959288169662016-03-28T11:45:00.000-07:002016-03-28T11:45:27.991-07:00Stronger Headwinds in 2016The general prognosis for the U.S. economy is for stronger headwinds to economic growth in 2016, but only a slight chance of recession, with the odds of a recession stronger in 2017. What this future recession might look like is anybody’s guess. Recessions like the one that hit in 2008 are relatively rare. Most recessions are a result of an economy overheating – producers produce too much for consumers to consume, everybody takes a little bath and then the economy gets back to growth one or two quarters later. The odds would suggest that a correction of this sort is all we’re in store for in the next few years, though global events and the lack of reform in Washington, D.C. keep the possibility of something more severe a possibility, albeit unlikely.<br />
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The two questions we should be asking are, first, what are these headwinds that might blow the economy off course, and second, how likely are they to impact Southern Nevada.<br />
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We’ll tackle the second question first. While Southern Nevada once had a reputation for being recession proof, the Great Recession put that myth to rest once and for all. In truth, Southern Nevada had never been recession proof, but tended to enter recessions late, and recover early. In the case of relatively minor recessions, the impact often went unnoticed. Southern Nevada had population growth to thank for this. Even when the locals were feeling the pinch of recession, more locals with additional incomes were moving into the Valley and offsetting the local weakness. <br />
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Southern Nevada can no longer depend on that kind of growth to keep recessions light. Population growth in Southern Nevada is lighter than a decade ago, though any growth in a region can help ameliorate a recession somewhat. Of course, each recession has its own particular character, and the character of a recession is a major factor in which regions and localities suffer the worst.<br />
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This brings us to the question of those headwinds. On a global scale, there is economic difficulty in Japan, China and Europe, and trouble in the natural resources sector has impact Canada, one of America’s most important trading partners. On the off chance that these troubles triggered a major global recession, Southern Nevada would of course feel the effects. More likely, these troubles will have a small impact on Southern Nevada’s tourist industry, and otherwise leave the Valley unscathed.<br />
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The more serious problem for Southern Nevada is the transportation sector. Globally, there is an over-abundance of transportation resources, and this is impacting transportation companies. In the BLS’s most recent numbers, there are two components of transportation employment that could impact Southern Nevada’s industrial real estate sector – truck transportation and warehousing and storage.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4TMr-M2RScoGcKvIwkgQ5SPPZP-AnvNL0aXe8Q-tDg2FaLaC6yDy-xY2SKOU6K5d8ycNJCHwxTzkNBDjX3Ytgep24UVP4Nq6AOr5gD9idw7AINYHvJ8ZBj01C6weSUVR3B1TdFCGxayg/s1600/Retail.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4TMr-M2RScoGcKvIwkgQ5SPPZP-AnvNL0aXe8Q-tDg2FaLaC6yDy-xY2SKOU6K5d8ycNJCHwxTzkNBDjX3Ytgep24UVP4Nq6AOr5gD9idw7AINYHvJ8ZBj01C6weSUVR3B1TdFCGxayg/s320/Retail.png" width="320" /></a></div>
The warehousing and storage sector saw jobs decrease by 0.4 percent from December 2015 to January 2016, while truck transportation increased by 1.5 percent. A mixed bag, but on the whole probably positive for Southern Nevada and its warehouse/distribution sector, which have been surging over the past year. The most recent numbers we have for Southern Nevada show the growth in transportation and warehousing employment slowing slightly at the end of 2015 after strong growth through most of the year. The sector added 200 jobs month-over-month in December 2015, and 1,500 jobs on a year-over-year basis.<br />
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The prognosis for Southern Nevada remains positive in 2016. There could be a small disruption in the warehouse/distribution sector if transportation suffers nationally, and developers who do not have pre-leasing in place in planned projects may want to be cautious about beginning construction on those projects. Tourism saw weak gaming revenue numbers in the latter half of 2015, which could point to overall spending by tourists softening, but this softening is probably not strong enough to throw the industry off the tracks in 2016. Retail employment on a year-over-year basis has been weak in Southern Nevada (losing 4,900 jobs between December 2014 and 2015), but that weakness has not been evident in taxable sales numbers (which, admittedly, lag a couple months behind). Again, this might point to caution rather than worry. The construction sector, which languished during the recession and most of the recovery, is now showing strong growth, suggesting that the local economy is expanding, rather than just recovering. Cautious optimism is probably the phrase that pays for Southern Nevada’s real estate market in 2016.<br />
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One last graph before I go. This tracks year-over-year job growth in three sectors, Alpha Employment, Beta Employment and Gamma Employment.<br />
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Alpha employment are jobs that drive an economy and bring money into the economy. For Southern Nevada, it includes natural resources, construction, leisure and hospitality and a portion of food and drinking places jobs. In the graph, you can see that alpha employment growth has been on the slide for the past few months.<br />
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Beta employment supports alpha employment. Theoretically, it consists of jobs that were created as a result of alpha jobs. It has also been sliding.<br />
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Gamma employment is government jobs, which are not designed to make money, and to some extent draws money out of the private sector. Gamma growth has jumped around a bit, but has been positive for the past four months.<br />
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This is a scheme I've only just started to explore, so no big revelations yet, but I think an interesting thing to watch.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-52104885855362989402016-02-01T09:40:00.000-08:002016-02-01T09:40:00.478-08:00Escorting the Gorilla from the RoomIf you have paid attention to the Las Vegas economy for any period of time, you have heard of the city’s economic Holy Grail … Diversification! We rely too much on the hospitality industry, and must diversify if we are to survive. Never mind the fact that we’ve gone from a population of about 5,000 people to around 2 million people in the last 100 years fueled by hospitality (they called it gambling back in the day), the future holds nothing but heartbreak if we do not diversify.<br />
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Of course, there is some truth to this. A more diverse economy would certainly boost Southern Nevada’s fortunes in the face of another economic downturn or a terrorist attack that struck the tourist industry. Diversification, though, is not necessarily easy. Industries operate in places not only because those places want them, but because those places offer a competitive advantage for them. The steel industry didn’t spring up in what we now call the “Rust Belt” because the local city fathers or chambers of commerce invited it. It arose where there was a ready supply of iron and coal and an efficient way to transport those raw materials to the foundries and the finished steel to its customers. A competitive advantage can be created by governments. Gaming predominates in Southern Nevada because Nevada made gaming legal. Southern Nevada also has lots of sunny days and nice weather – another boost to tourism. Government can also create a competitive advantage by offering financial incentives, but that is a very expensive way to attract new businesses to a region.<br />
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The other day, I decided to conduct a little experiment. I wanted to discover just how “un-diverse” the local economy was compared to other large cities. To do this, I decided to compare Las Vegas to another economy that is dominated by a large industry, in this case Houston, Texas.<br />
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The experiment was simple. Using the official employment numbers for the Las Vegas MSA and the Houston MSA, I backed out each community’s 600-pound gorilla – hospitality for Las Vegas, “mining & logging” for Houston (which includes the oil industry), and then looked at the percentage of jobs in the other employment categories. Here are the results:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFC2AxTOBzuEqrKxplS_mtLL2nUaQwQ04yrL0A289b4xOdgl6I_s1Q-LQMWrpQwBIEgS0Vs3aTqlWdo1VvqJj5SZVrEu8wlmrWefZniYD7y2sUYleTo0-EcLZkbIIXd0VRw8iq0MBsRkg/s1600/Houston.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="470" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFC2AxTOBzuEqrKxplS_mtLL2nUaQwQ04yrL0A289b4xOdgl6I_s1Q-LQMWrpQwBIEgS0Vs3aTqlWdo1VvqJj5SZVrEu8wlmrWefZniYD7y2sUYleTo0-EcLZkbIIXd0VRw8iq0MBsRkg/s640/Houston.png" width="640" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgU2peT5esAbhN1scHar8VyeScvfCf7g5pv8sM4V7WRsXv2GpJcx183psAKrGdtSNvtO0Jay6XxuGZ_AHy569m61XUe1QpM-C4WXq0QhPyPp9K2yUdERLsUtYhW9PWP0Sd_4ybVOD8RT9A/s1600/LasVegas.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="470" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgU2peT5esAbhN1scHar8VyeScvfCf7g5pv8sM4V7WRsXv2GpJcx183psAKrGdtSNvtO0Jay6XxuGZ_AHy569m61XUe1QpM-C4WXq0QhPyPp9K2yUdERLsUtYhW9PWP0Sd_4ybVOD8RT9A/s640/LasVegas.png" width="640" /></a></div>
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The main differences between the economies are more manufacturing in Houston than in Las Vegas (possibly stimulated by the petroleum industry and Houston being a port city), and more trade, transportation and utility employment in Las Vegas than in Houston (possibly stimulated by the hospitality industry). Had I done this comparison several years ago, Las Vegas would have also shown a predominance of construction jobs – not surprising in a city as young as Las Vegas and one growing at such a rapid rate.<br />
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The bottom line – Southern Nevada, like many cities, is dominated by an industry that has found it a particularly competitive place to be located. Outside of that industry, Southern Nevada is not terribly different from Houston in terms of how people there make a living. As Southern Nevada grows older, the economy will likely grow more diverse, or at least as diverse as it needs to be.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-51327505857420729072016-01-26T09:20:00.000-08:002016-01-26T09:20:00.776-08:00Recovery and Transition<div class="separator" style="clear: both; text-align: center;">
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The economy is not only going through (or suffering through? – it seems like it sometimes) a recovery after a rather rough recession/depression/panic, it is also going through a transition that started with the invention of the World Wide Web, or really, with the invention of the computer itself. In truth, economies are almost always going through some sort of transition – innovations do not stop or start, but always seem to be trickling in. Computers and the internet, though, just like steam before them, are putting the global economy through a much larger transition than we might be used to. The effects are happening slowly; it takes time to find the next market efficiency, and most new market efficiencies are resisted by the existing major players and the congressmen they employ. But happening they are, and happen they will and your best bet is to get on board sooner rather than later.<br />
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Efficiency really is the name of the game. It is the reason capitalism, with its focus on competition, beats mercantilism (i.e. crony capitalism) and socialism. Efficiency in this regard means cutting costs – getting the most for the least – and commercial real estate is a great place to make those cuts. For one thing, values were forced to reset after the Great Recession. But more importantly, computers and the internet continue to change the way people work. Office tenants have been trending towards less office space per worker. Computers are only getting smaller, and smart phones and broadband allow more workers to be productive away from the office. So even when office firms are hiring and signing leases, it’s likely that they’ll be taking smaller spaces, relatively, than they did in the past, and this extends the time it will take for the office market to fully recover.<br />
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Medical office has been going through a similar transition. The day of the artisan doctor – one man in one office with his own receptionist and assistants – is over, and the new era of medical groups has arrived. Doctors become salaried employees who are not on call 24 hours a day, 7 days a week, several doctors share a receptionist and office staff, and ultimately take less medical office space per employee than they would have in the past. The reason for this transition is the screwed up world of health insurance and government regulations, of course, not technology, but it’s a transition just the same, and one that brokers should pay attention to. Moreover, healthcare providers are moving into retail centers to get closer to customers and, more importantly, to probably pay less for rent.<br />
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Retail has other problems though, in the form of online retail. Shopping online doesn’t cost more, and it’s often more convenient (two generations of rampant narcissism has done nothing to make the shopping experience more pleasant), so it’s on the rise. More online sales means less demand for physical retail real estate – witness mass closures of Staples and Radio Shack, and shrinking retail concepts from grocery to electronics.<br />
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The big winner in all this might be industrial space. If the trend is towards spending less on commercial real estate, industrial product, which tends to be less expensive than either retail or office space, becomes an option. This is particularly true when it comes to online retailers. While they do not need physical retail space, they do need physical warehouse space, and giants like Amazon appear to be aiming to have warehouse space in every major and minor city in the country to allow them to ship to their customers, and accept returns from their customers, as quickly as possible.<br />
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The slow post-Great Recession recovery is not just slow because it’s slow, it’s slow because businesses are forging a brand new identity and are finding brand new ways to do business. Commercial real estate will adapt to this transition, but only if real estate professionals recognize it. Those who do will likely reap the reward of being ahead of the competition.<br />
<br />John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-86140403864746230922016-01-19T09:16:00.000-08:002016-01-19T09:16:02.015-08:00Not Obsolete - Demand Challenged<div class="separator" style="clear: both; text-align: center;">
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A few weeks ago, I began an investigation into obsolescence of buildings in the office market here in Southern Nevada. The question has been floating around for several years now: Is obsolete space artificially increasing Southern Nevada’s office vacancy. This is an interesting question, and not an easy question to answer.<br />
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The first challenge is in identifying what makes a property obsolete. The factors might be structural (i.e. how the property is designed) or geographic (i.e. where the property is located). The character of the ownership of a property might make it obsolete as well. All of these are important factors, but they not necessarily easy to quantify – at least not when you have a few hundred properties to work with.<br />
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The term obsolete is itself a problem, as needs change over time, a formerly “obsolete” property can become viable once again. Witness the brief moment before the Great Recession when vacant retail big boxes suddenly became attractive to call centers (before they moved to India and then moved back to the United States ...).<br />
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For my part, I decided to ditch the term obsolete, and use the term “less desirable”. To decide whether a property was less desirable, I first examined the lease comps we have collected over the past three years to determine the average time on market for each class of office.<br />
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On average, Class A availabilities remained on the market for 2.7 years before they were leased. Class B availabilities remained on the market for 2 years. Class C availabilities for 1.6 years. I then assumed that an availability that was on the market for twice as long as this average period of time was “less desirable” for one reason or another. <br />
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Using this assumption, I got the following stats:<br />
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Class A: 25% of available space is less desirable<br />
Class B: 25% of available space is less desirable<br />
Class C: 34% of available space is less desirable<br />
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If you removed this less desirable space from the market (without removing the “less desirable” buildings this space is in from total inventory), you would bring office vacancy down to around 13 percent. This appears to make the case that the office market, though not as healthy as it was before either the Great Recession or the Boom, is not as unhealthy as it seems.<br />
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I wasn’t done, though. I decided next to look the situation on a building by building basis, using the office market as my test case. It is possible to have a less desirable available unit in an otherwise desirable property, so simply looking at less desirable availabilities can skew our results. I wanted to figure out which properties in Southern Nevada were generally less desirable.<br />
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To figure out which buildings would make the list, I tallied the “less desirable” space in each building. If that space represented 50% or more of that building’s total size, I deemed the building “less desirable”. <br />
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What did I learn from this experiment? <br />
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1. There is a great deal of old space available in the office market. Medical office space is worse off than professional office space, and office space is worse off than industrial and retail space.<br />
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2. Medical Class B and Industrial Flex space stay fresher longer; the average Class B Medical unit was on the market for 1030 days before it leased, and for Flex 1380 days, indicating that tenants in these product types don’t care much if a space has been vacant for an extended period. Quickest turnover is in Incubator, Medical Class A and C and in Strip Centers.<br />
<br />
3. Less desirable buildings are not the same thing as old buildings. The average age of less desirable buildings is 16 years, but the buildings themselves range in age from 5 to 37 years old.<br />
<br />
4. Old parts of town do not dominate in the less desirable category. Properties built in the waning days of the Boom have struggled to absorb space. If any submarkets dominate, it is the Southwest along the Beltway, the Airport submarket and West Central. East Las Vegas, Henderson, Northwest, Downtown and the small North Las Vegas submarkets actually come off pretty well.<br />
<br />
5. The Beltway is not a bust, but it does not seem to automatically increase the desirability of office space. Many of Southern Nevada’s less desirable properties are located near the 215. As alluded to above, the old center of the Valley – what we would characterize as Downtown, East Las Vegas and West Central – have the fewest “less desirable” buildings.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-52919045835521425882016-01-12T09:12:00.000-08:002016-01-12T09:12:00.271-08:00Into the Weeds with EmploymentFor several centuries now (or maybe it just feels like centuries), I have tracked Southern Nevada employment and used it as an aid in determining future performance of the industrial, office and retail markets. The concept was simple. Tie the different sectors of employment to the product types, look at the employment trend, and extrapolate commercial real estate performance. More jobs usually means more occupied square feet.<br />
<br />
This was fine as a thumbnail sketch, but there were weaknesses in this concept. The employment sectors used by the State of Nevada for a given business do not always relate to what that business is using its occupied space for. A manufacturing company, for example, might take industrial space in which to actually manufacture things, but it might also take office space for its executives and accountants and such. Whether the company is in industrial or office space, it is still a manufacturing company, and its employees might – might! – be included in the manufacturing category, whether they are in industrial or office space.<br />
<br />
I decided a few months ago to try to figure out, as nearly as possible, what percentage of jobs in these different employment sectors were tied to the different types (and subtypes) of commercial real estate. To do this, I downloaded random groups of companies from Sales Genie. This data included the SIC code for the company in question, its address and the number of employees at that location. I then cross-referenced the addresses to the properties in our own database, and thus determined the product subtype occupied by each business. It was then easy to discover how many employees from each SIC code were stationed in each subtype (and class, in the case of office properties). Granted, time restraints forced me to rely on random samplings of businesses, but I plan to revisit this process each year to further refine my data.<br />
<br />
For an example, let’s look at industrial space. In the past, “industrial employment” was a sum of the following employment sectors: Construction, Manufacturing, Transportation & Warehousing and Wholesale. Now, I know that industrial properties take in a share of virtually all sectors of employment. Because of this, I know that industrial employment is actually larger than previously thought, and the drop in employment between 2010 and 2011 less severe.<br />
<br />
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As a result, I think I have a much better idea now of how changes of employment impact the different property types, and therefore have an improved aid in predicting future demand.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-76645176613663077352016-01-05T09:04:00.000-08:002016-01-05T09:04:00.976-08:00Moving TargetsThink of the economy as a river. A river is water that is moving from a higher elevation to a lower elevation. If anything gets in its way, the water moves around it or, eventually, through it. There’s no thought process involved, or the act of a higher power. Water is driven by gravity to find the lowest ground it can.<br />
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Economies are likewise driven to be efficient. Producing the largest quantity at the lowest price. Why? Because human beings demand it. There is almost no end to what human beings want, and therefore producers want to produce as much of something as they can, and consumers, who have so many desires, want to pay as little as possible. Ultimately, the marketplace is where consumers and producers meet in the middle.<br />
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<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_2bJiabBcvLP5NAaNma0bVl-NLlFAlQ0S-b-yM_deUM1kUAE-uG8xMZ15xuFr8D0S8SRlkLTGyCXG1EGkl5xzxwYLjBD38evNuT4ZiHPk_h8F9qF5pvgeXzEnJEjYOM2r_l_8R3Rs7Fo/s1600/Ansel_Adams_-_National_Archives_79-AAB-01.jpg" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_2bJiabBcvLP5NAaNma0bVl-NLlFAlQ0S-b-yM_deUM1kUAE-uG8xMZ15xuFr8D0S8SRlkLTGyCXG1EGkl5xzxwYLjBD38evNuT4ZiHPk_h8F9qF5pvgeXzEnJEjYOM2r_l_8R3Rs7Fo/s400/Ansel_Adams_-_National_Archives_79-AAB-01.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Hoover Dam, photo by Ansel Adams</td></tr>
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Human beings can erect dams to manipulate the flow of water. Note that I said manipulate, not stop. The water cannot be stopped. Hoover Dam forces water through channels to spin dynamos, but it doesn’t stop the water from flowing. Other dams force the water into fields to irrigate crops, but they do not stop the water.<br />
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Likewise, human governments can erect regulations, taxes and other such things to manipulate an economy. They can make something artificially cheap or expensive, but eventually the market will work around those artifices to put that product at the “natural” market price.<br />
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I’ve recently read an article about innovations in healthcare. The supply of healthcare is, like a river, finding a way around artificial impediments. Because the old way of delivering healthcare, via individual doctors and surgeons, has been made artificially expensive with cost-sharing “health insurance” and government mandates, producers and consumers are finding a way to “meet in the middle” with medical groups, do-it-yourself treatment aided by handheld computers (let’s stop calling them cell phones – they’re really so much more), health clinics, etc. At the moment, the victim of this market-driven innovation is medical office space. Medical office space was designed to serve the old market of doctors and patients. At the moment, it is being negatively impacted by the change in healthcare delivery – a change initiated not by the free market, but by large public and private institutions. <br />
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Will we, at some point, return to a more traditional model? Perhaps. As healthcare delivery moves away from the very institutions that sought to dominate it, they will have to adapt or die. In the meantime, the medical office will have to adapt to the new way of doing things. It may do this by clever redesigns to serve medical groups and health clinics, or by re-purposing itself to other uses.<br />
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Thus the ebb and flow of commerce continues. Keep this in mind when dealing with developers and building owners. The consumer (in this case the potential tenant or buyer) is always a moving target, and forces much larger than they are in the driver's seat. Spend some time understanding the macro-economy to better understand the micro-economies you deal with when you represent a landlord or tenant.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-74179792952673772462015-12-22T08:42:00.000-08:002015-12-22T08:42:00.299-08:00Income and ExpensesYou might have read that incomes have been stagnant in the United States for the last 30 or more years. The rich are getting richer, of course, but all of us folks in the middle and lower class have been held in place, no growth, for decades.<br />
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Of course, for those of us who actually remember the 1980s and 1990s, this impression might seem a little off. My middle class life in the 1980s wasn’t nearly as plush as my middle class life is now, but perhaps I’m just mis-remembering things.<br />
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A look online shows up a median household income in 1982 of $18,801. Adjusting for inflation, that’s about $46,123 in 2014. Median household income in 2014 … $49,486. So there has been growth, but not much growth. The median income does appear to have been fairly stagnant over the past thirty years.<br />
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Focusing on incomes, however, misses the other side of the coin … expenses. Let’s look at groceries. I found a few prices from the 1980’s. We can adjust them for inflation, and then compare to modern prices I plucked from the internet.<br />
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According to this data, food prices are generally lower now than in the 1980’s. I remember eating lots of ground beef and tuna casserole in the 1980’s and not much steak, so this rings true to me. Steak was a treat when I was a kid. Heck, Shake-N-Bake chicken was a pretty big deal back in the day.<br />
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It’s not just food. In 1986, you could get a nice Commodore computer for about $400. In modern dollars, that’s about $864. A modern, base line Dell computer (with monumentally more computing power than that old Commodore) runs about $400 as well. A thousand times more computer at half the price. Not too shabby.<br />
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How about smart phones? A modern smart phone can replace all sorts of 1980’s technology – brick phones, the Sony Walkman, cameras, video cameras, digital watches, personal computers, GIS systems (to which nobody but the military had access). Add these together, and you’re looking at about $5,000 worth of tech (most of it from the mobile phone alone) in 1980’s dollars, and about $11,000 in today’s dollars. A new smart phone comes in at around $300 to $400.<br />
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Of course, this is not the case with everything we buy. Stamps in 1980, adjusted for inflation, were about $0.03 cheaper than then they are today. Comic books are more expensive (and smaller) now than then, but they’ve also shifted from being sold on newsstands to children to being sold to adults in boutique comic book stores. Books are also more expensive now than then (even on Kindle). A Camero Coupe in 1980 went for an adjusted $18,600. A modern Camero Coupe goes for $23,700 MSRP – a higher price, but for a superior automobile. Gas is cheaper at the moment (around $2.03 per gallon now vs. an inflation adjusted $2.96 per gallon in 1980), though that might change, and of course a year ago gas would have more expensive now than then. Note also the meteoric rise in the cost of education and health care – two segments of the economy with significant government involvement (just sayin’).<br />
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It is also enlightening to look at adjusting asking rates for commercial real estate. While I don’t have asking rates going back to the 1980’s, I do have asking rates going back to 2002. If we adjust those old rates to 2014 dollars, you realize just how inexpensive commercial real estate has become.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgW32ufuHUOmX39VJTzhyfy6y9lKHpv1kxmWtHmpm04AZD1u1w-DA_J6HjV2dgvUe5bAKY_kTaIb220XwpFBG4PePMmY0CKdFARCqGEWgf1krYQEZ-MblNMMnzN63R0KLWKq0LiOerLFME/s1600/Prices2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="94" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgW32ufuHUOmX39VJTzhyfy6y9lKHpv1kxmWtHmpm04AZD1u1w-DA_J6HjV2dgvUe5bAKY_kTaIb220XwpFBG4PePMmY0CKdFARCqGEWgf1krYQEZ-MblNMMnzN63R0KLWKq0LiOerLFME/s640/Prices2.png" width="640" /></a></div>
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The story here is not just how much or how little incomes have changed, but the buying power of the dollar. The marketplace has knocked down prices on not only our day-to-day needs, but also on luxuries. Despite seemingly stagnant incomes, Americans today have much more buying power than they did decades ago, which begs the question … why are we so deep in debt?John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-86785721245954850272015-12-15T08:31:00.000-08:002015-12-15T08:31:00.343-08:00Inside the Box<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZk2kXWuxQiEp-kzodP-TsaCdI9qIlQKBDrdtAjFIo-gwwAix_hjVNlILBvZrYJcJ3BqQEvZ9C6P6LizdUykmCyQDK_MbzhRAoH0qbHvd1qZxrGqXXKrl9fI0TKGo26q7DHt46cCH0FSo/s1600/Tortoiseshell_cat_Cindy_in_a_box.jpg.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZk2kXWuxQiEp-kzodP-TsaCdI9qIlQKBDrdtAjFIo-gwwAix_hjVNlILBvZrYJcJ3BqQEvZ9C6P6LizdUykmCyQDK_MbzhRAoH0qbHvd1qZxrGqXXKrl9fI0TKGo26q7DHt46cCH0FSo/s640/Tortoiseshell_cat_Cindy_in_a_box.jpg.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Cat in a box <span class="copyright">Calicocindy/ Public domain</span></td></tr>
</tbody></table>
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We live in a world of “experts”. Many people opining every hour on the hour on every subject known to man ... and virtually none of them know what they’re talking about. Why? Because they’re universalists. Rather than just make statements about what they actually know, they take their limited knowledge and try to stretch it out to cover everything. Here’s where they run into trouble. Their reach exceeds their grasp.<br />
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“You should always think outside the box.” A universal statement. If we took these philosophizers at their word, it should apply to everyone in every situation all the time. Are you stuck on a roof and trying to figure out how to get down? Don’t climb down – that’s “inside the box” thinking. Try jumping off instead. It may get you inside the emergency room, but at least you’re “outside the box”. The statement was once meant to encourage finding new solutions to old problems, but I fear it has been transformed into pretending that old limitations no longer existed.<br />
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Wisdom is the synthesis of not just all of your own years of experience, but of thousands of years of human experience, transmitted through books, stories and, yes, sometimes cute little one-liners. Wisdom means taking in the current data, checking it against previous patterns, and then making a decision on how to proceed knowing full well that your decision may be wrong, and thus demands a “plan B”. When, during the early 2000’s, it seemed impossible that Las Vegas would ever stop growing, that the national economy would ever again experience a downturn, that land really should be selling for a bazillion dollars an acre, “outside the box” thinking was at play. The old rules, the old patterns – they no longer applied. Alas – some “inside the box” thinking would have helped quite a bit.<br />
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The universe is a very ancient construct, and it is governed by the same laws now as it was billions of years ago. Likewise, human beings. Irrational exuberance, greed and jealousy have been with us from the very beginning, and will always be with us. Every hundred years or so there’s a whole new humanity, but they’re constructed from the same old models and have to learn the same lessons their ancestors learned. The irrational exuberance of the 1920’s that resulted in people borrowing money to buy stock that would increase in value before they had to pay their loans was the same irrational exuberance in the 2000’s that resulted in people borrowing money to buy real estate that would increase in value before they had to pay their loans. The latest iteration might be large corporations borrowing money to buy back their own stock to juice the value of the stock. <br />
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When it comes time to predict the future of anything, crawl inside the box and see what those who came before you scrawled on the walls. You might save yourself some trouble (and money). You might even make a fortune.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-37392577000714079232015-12-08T08:21:00.000-08:002015-12-08T08:21:00.850-08:00Groping in the Dark<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJ_ag5HJ8k6L-RwPBxvJvKAv2nhBKYV9HDrK2suwin_e8U6FzTdrpWawNOXtCU3ar4ZhqA22wBVKp1IFjFw4joC-yRr4Vt1FQW08-C8KPAEcW-M31YcL9noIb7k5wnDPOA6YHW4ICdpV4/s1600/Antep_erased2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="416" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJ_ag5HJ8k6L-RwPBxvJvKAv2nhBKYV9HDrK2suwin_e8U6FzTdrpWawNOXtCU3ar4ZhqA22wBVKp1IFjFw4joC-yRr4Vt1FQW08-C8KPAEcW-M31YcL9noIb7k5wnDPOA6YHW4ICdpV4/s640/Antep_erased2.jpg" width="640" /></a></div>
For the last couple weeks, I’ve been reading a book called <a href="https://draft.blogger.com/For%20the%20last%20couple%20weeks,%20I%E2%80%99ve%20been%20reading%20a%20book%20called%20The%20Horse,%20The%20Wheel%20and%20Language.%20Once%20upon%20a%20time,%20there%20was%20no%20such%20thing%20as%20England%20and%20France,%20no%20such%20thing%20as%20the%20Roman%20Empire,%20and%20not%20even%20the%20ancient%20Greeks%20we%20know%20so%20well%20(or%20should%20know%20so%20well,%20if%20we%20paid%20attention%20in%20school).%20All%20of%20these%20people%20spring%20from%20a%20common%20source,%20or%20so%20the%20theory%20goes,%20a%20source%20they%20have%20in%20common%20with%20Iran%20and%20at%20least%20some%20people%20in%20India.%20This%20source%20is%20a%20group%20called%20the%20Indo-Europeans.%20These%20people%20were%20linked%20by%20language,%20and%20the%20book%20argues%20that%20they%20originated%20on%20the%20steppes%20north%20of%20the%20Black%20and%20Caspian%20Seas,%20gradually%20spreading%20west%20and%20south.%20Now,%20at%20this%20point,%20you%E2%80%99re%20praying%20that%20I%E2%80%99m%20getting%20to%20a%20point,%20and%20I%20am.%20%20These%20Proto-Indo-Europeans%20I%E2%80%99m%20talking%20about,%20and%20most%20of%20the%20peoples%20living%20around%20them,%20had%20not%20yet%20invented%20writing,%20so%20everything%20we%20know%20about%20them%20we%20know%20because%20we%20dug%20it%20up%20and%20studied%20it.%20These%20people%20lived%20in%20and%20around%20the%20era%20called%20the%20%E2%80%9CNew%20Stone%20Age%E2%80%9D,%20around%205000%20to%203000%20BC.%20Archaeologists%20have%20a%20tough%20time%20reconstructing%20these%20societies.%20For%20one%20thing,%20all%20they%20have%20to%20work%20with%20are%20shards%20of%20old%20pottery%20and%20other%20old%20artifacts%20of%20stone,%20bone%20and%20antler,%20the%20position%20of%20people%20in%20burials%20(unless%20the%20culture%20cremated%20its%20dead,%20in%20which%20case%20they%20don%E2%80%99t%20even%20have%20bodies%20to%20work%20with),%20and%20sometimes%20the%20foundations%20of%20the%20buildings.%20Try%20reconstructing%20the%20existence%20of%20rap%20music%20from%20the%20ash%20trays%20discarded%20during%20the%20early%201980%E2%80%99s.%20Not%20only%20difficult,%20but%20impossible.%20%20%20It%E2%80%99s%20made%20more%20difficult,%20though,%20by%20the%20fact%20that%20you%20have%20to%20create%20wide,%20sweeping%20guesses%20about%20a%20people%20that%20might%20be%20completely%20negated%20when%20the%20next%20grave%20is%20dug%20up,%20or%20when%20somebody%20figures%20out%20how%20to%20track%20human%20movements%20thousands%20of%20years%20ago%20based%20on%20genetic%20evidence%20that%20we%20couldn%E2%80%99t%20read%20even%20twenty%20years%20ago.%20%20Economists%20and%20researchers%20have%20a%20similar%20problem.%20Much%20of%20what%20we%20do%20is%20take%20disparate%20statistics%20%E2%80%93%20the%20number%20of%20jobs%20created%20(and%20what%20kinds%20of%20jobs%20were%20created),%20the%20amount%20of%20money%20spent,%20the%20number%20of%20visitors%20to%20Las%20Vegas,%20the%20vacancy%20of%20commercial%20buildings%20%E2%80%93%20and%20try%20to%20weave%20them%20into%20a%20meaningful%20narrative.%20The%20narrative%20has%20to%20be%20meaningful,%20because%20it%20must%20be%20utilitarian.%20Business%20people%20don%E2%80%99t%20read%20our%20reports%20out%20of%20a%20general%20interest%20in%20the%20history%20of%20commercial%20real%20estate,%20but%20because%20they%20want%20to%20use%20this%20information%20to%20become%20more%20prosperous.%20The%20problem%20is%20that%20those%20numbers%20we%20base%20our%20narratives%20on%20are%20often%20late,%20and%20sometimes%20change%20after%20we%20have%20already%20used%20them%20to%20weave%20a%20narrative.%20%20If%20you%20visit%20the%20Bureau%20of%20Economic%20Analysis%20and%20look%20at%20a%20recent%20report%20on%20gross%20domestic%20product,%20you%20will%20note%20that%20it%20is%20titled%20something%20like%20%E2%80%9CGross%20Domestic%20Product:%20First%20Quarter%202015%20(Advance%20Estimate)%E2%80%9D.%20It%20is%20an%20estimate,%20in%20advance%20of%20the%20actual%20numbers.%20The%20actual%20numbers%20won%E2%80%99t%20be%20known%20for%20another%20quarter%20or%20two,%20which%20means%20to%20tell%20you%20what%20is%20happening%20now%20(which%20is%20what%20you%20want%20to%20know),%20we%20have%20to%20base%20our%20narrative%20on%20numbers%20that%20are,%20frankly,%20incorrect.%20They%20will%20change.%20We%20know%20they%20will%20change.%20Each%20year,%20the%20Bureau%20of%20Labor%20Statistics%20revises,%20sometimes%20dramatically,%20the%20job%20numbers%20of%20the%20previous%20year%20%E2%80%A6%20the%20job%20numbers%20people%20like%20me%20have%20been%20talking%20about%20and%20using%20in%20our%20indexes%20and%20formulas%20to%20help%20you%20guess%20what%20is%20going%20to%20happen%20in%20the%20future.%20It%20may%20not%20be%20a%20matter%20of%20deducing%20how%20people%20lived%20based%20on%20a%20scrap%20of%206,000%20year%20old%20pottery,%20but%20it%20is%20tricky%20and%20it%20all%20leads%20to%20this%20point:%20Take%20everything%20an%20economist%20tells%20you%20with%20a%20grain%20of%20salt.%20Economics%20is%20called%20the%20dismal%20science,%20but%20when%20economists%20tell%20you%20what%20is%20happening%20now,%20or%20what%20will%20happen%20soon,%20they%20are%20practicing%20not%20the%20dismal%20science,%20but%20the%20dismal%20art.%20%20And%20now%20I%20have%20to%20get%20back%20to%20telling%20you%20what%20is%20going%20to%20happen%20in%202016,%20provided%20I%20can%20find%20my%20deck%20of%20tarot%20cards.%20%20JMS"><i>The Horse, The Wheel and Language</i></a> by David W Anthony. Once upon a time, there was no such thing as England and France, no such thing as the Roman Empire, and not even the ancient Greeks we know so well (or should know so well, if we paid attention in school). All of these people spring from a common source, or so the theory goes, a source they have in common with Iran and at least some people in India. This source is a group called the Proto-Indo-Europeans. These people were linked by language, and the book argues that they originated on the steppes north of the Black and Caspian Seas, gradually spreading west and south. Now, at this point, you’re praying that I’m getting to a point, and fortunately I am.<br />
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These Proto-Indo-Europeans I’m talking about, and most of the peoples living around them, had not yet invented writing, so everything we know about them we know because we dug it up and studied it. These people lived in and around the era called the “New Stone Age”, around 5000 to 3000 BC. Archaeologists have a tough time reconstructing these societies. For one thing, all they have to work with are shards of old pottery and other old artifacts of stone, bone and antler, the position of people in burials (unless the culture cremated its dead, in which case they don’t even have bodies to work with), and sometimes the foundations of the buildings. Try reconstructing the existence of rap music from the ash trays discarded during the early 1980’s. Not only difficult, but impossible. <br />
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It’s made more difficult, though, by the fact that you have to create wide, sweeping guesses about a people that might be completely negated when the next grave is dug up, or when somebody figures out how to track human movements thousands of years ago based on genetic evidence that we couldn’t read even twenty years ago.<br />
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Economists and researchers have a similar problem. Much of what we do is take disparate statistics – the number of jobs created (and what kinds of jobs were created), the amount of money spent, the number of visitors to Las Vegas, the vacancy of commercial buildings – and try to weave them into a meaningful narrative. The narrative has to be meaningful, because it must be utilitarian. Business people don’t read our reports out of a general interest in the history of commercial real estate, but because they want to use this information to become more prosperous. The problem is that those numbers we base our narratives on are often late, and sometimes change after we have already used them to weave a narrative.<br />
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If you visit the <a href="http://www.bea.gov/">Bureau of Economic Analysis</a> and look at a recent report on gross domestic product, you will note that it is titled something like “Gross Domestic Product: First Quarter 2015 (Advance Estimate)”. It is an estimate, in advance of the actual numbers. The actual numbers won’t be known for another quarter or two, which means to tell you what is happening now (which is what you want to know), we have to base our narrative on numbers that are, frankly, incorrect. They will change. We know they will change. Each year, the <a href="http://www.bls.gov/">Bureau of Labor Statistics</a> revises, sometimes dramatically, the job numbers of the previous year … the job numbers people like me have been talking about and using in our indexes and formulas to help you guess what is going to happen in the future. It may not be a matter of deducing how people lived based on a scrap of 6,000 year old pottery, but it is tricky and it all leads to this point: Take everything an economist tells you with a grain of salt. Economics is called the dismal science, but when economists tell you what is happening now, or what will happen soon, they are practicing not the dismal science, but the dismal art.<br />
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And now I have to get back to telling you what is going to happen in 2016, provided I can find my deck of tarot cards.<br />
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JMSJohn Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-25332575300523466262015-12-01T08:14:00.000-08:002015-12-01T08:14:00.550-08:00Retail and CultureOnce upon a time, it is said, the United States of America had a mono-culture. All Americans, they say, watched the same programs, listened to the same music, ate the same food and wore the same clothes. This is not quite right … but it’s almost right. There was a time when the mainstream of culture was pretty wide. To some degree, this had a lot to do with the means of communication. In the 1930’s, for example, major theatres were owned by the major film studios, and played the movies of those studios exclusively. When this was broken up, the studios had to work harder to get butts in seats – they could no longer funnel people in to see their big films. Likewise television. In the 1960’s you have three major networks and maybe one or two local channels showing re-runs. In the 2000’s, you still have the big three (well, four including FOX), but you have a couple hundred cable networks and, more importantly now, Netflix, Hulu, and YouTube. My daughter watches more YouTube and Netflix in a day than television by a wide margin.<br />
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As the choices available to consumers has multiplied, the so-called “mono-culture” has fractured. Various TV shows, magazines, movies, books and songs that are popular no longer penetrate the overall culture to the extent they once did. One can still point to the best-selling comic book of 2015, for example, but its sales numbers are so anemic they would have gotten it canceled after a single issue back in 1970. Take movies for instance.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0OEkzwWLaK8BsoW89mGStzY3sg0bZunMIWDwFJngfXB-g89bwqcS2T2ps8r50DcopyGruYl41SuYdijCvFS83Vwx-6KRzkI397F9eisotYz6Ql5ACPU5vgQu4P8s4RLZi6wYOxoAomb0/s1600/MovieTickets_JohnMStater.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0OEkzwWLaK8BsoW89mGStzY3sg0bZunMIWDwFJngfXB-g89bwqcS2T2ps8r50DcopyGruYl41SuYdijCvFS83Vwx-6KRzkI397F9eisotYz6Ql5ACPU5vgQu4P8s4RLZi6wYOxoAomb0/s640/MovieTickets_JohnMStater.png" width="640" /></a></div>
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The graph above shows the number of tickets the top grossing movie of each year sold as a percentage of the U.S. population in that year. There were ups and downs, and some notable major successes: Gone with the Wind wins hands-down, but The Ten Commandments, The Sound of Music, Star Wars and ET: The Extra-Terrestrial are all pretty popular movies, being viewed, so-to-speak, by about the half the people in the country (well, probably not half, since plenty of people went twice or three times, but you get the idea). Titanic was maybe the last movie to get quite that much penetration into the culture. People made a big deal about Avatar, but in terms of cultural penetration, it didn’t do much better than some of the weaker films of the 1940’s. The trend line on the graph shows the overall rise of the movie in importance to popular culture, and the subsequent fracturing of that culture beginning in the 1970’s and continuing to this day.<br />
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So what’s the point?<br />
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I wonder if the continued fracturing of the culture also means a fracturing of people’s shopping habits. As sub-cultures on the fringe become larger in comparison to the shrinking “mainstream”, retailers will have to diversify their stock to serve them, which would suggest larger stores, or we will see the rise of specialty stores with higher price points (small sub-cultures cannot take advantage of economies of scale the way a monolithic culture can) and less real estate, i.e. smaller shops.<br />
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To date, the trend does seem to be “smaller is better” for anchors, though to be fair the trend was “larger is better” just a few years ago. Cultural fracking is probably not the source of these particular shifts. If the trend is for smaller locations, it might take many years to realize it in terms of statistics, since retailers are often forced to take space that is anywhere from 5 to 20 years old (or older). More likely, we would first see the trend in lower rental rates, as niche retailers are forced to take more space than they need, and seek to redress this by paying less for the space. Something to think about and look for in the coming years.<br />
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JMS<br />
<br />John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-10041128667085409032015-11-24T08:07:00.001-08:002015-11-24T08:07:17.316-08:00Almost ThereWhen the Great Recession hit, back in ’08 (read that as “aught-eight” if you want to sound like an old pioneer), I decided to begin tracking the recovery that I assumed would eventually follow. I devised an index of economic measures that I thought had an impact on commercial real estate, and began tracking them. Month in, and month out, for eight years I’ve tracked these numbers, watching the index get worse, at first, and then begin to show some upward movement. Today, I am proud to announce that the index has almost returned to where it was in January 2005, midway into the boom.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid1bkZ1f1ghGAuXTNVBTFwS_O6Zsbxk8xsA6Pzf3xcrbxXT2sCpxdtGA7OEvrxsG3BNd80vWWALhVPE1RSxh2BS7fn28UA3JoFkH1y6kJDrxPuwzWH11wRrqocpY_wIPeeJjzzfk0pAFI/s1600/ColliersInternationalLasVegas_SouthernNevadaCRERecoveryIndex_Sep2015_JohnMStater.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="456" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid1bkZ1f1ghGAuXTNVBTFwS_O6Zsbxk8xsA6Pzf3xcrbxXT2sCpxdtGA7OEvrxsG3BNd80vWWALhVPE1RSxh2BS7fn28UA3JoFkH1y6kJDrxPuwzWH11wRrqocpY_wIPeeJjzzfk0pAFI/s640/ColliersInternationalLasVegas_SouthernNevadaCRERecoveryIndex_Sep2015_JohnMStater.png" width="640" /></a></div>
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Since historical context is valuable, the Recovery Index goes back to 1996. For that year, the index averages 68.5, which can be interpreted to mean that the local economic drivers of commercial real estate were about 69 percent as strong in 1996 as they would be in 2005. In 2006, the strongest overall year for the local economy, the index averaged 106.5. The highest index measure was in September 2006, when it hit 108.8. The worst year for the local economy was 2010, when the index averaged 84.7 – still well above 1996, but well below 2005. The lowest measures of the index came in April and May of 2010, at 83.3. Essentially, the Great Recession brought the local economy back to where it had been during the early 2000’s, erasing seven years of growth.<br />
So far in 2015, the index has averaged 96.6, roughly equal to mid-2004. The highest recent measure was in September 2015, at 98.9. We’re at about 99 percent of where we were in 2005, a decade ago.<br />
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Of course, not all measures are increasing at the same rate. At this point, five of the eight measures are back over 100 – Gaming Revenue, Visitor Volume, Employment, Taxable Sales and LA Port Traffic. These measures range from 101.5 (visitor volume) to 120.9 (taxable sales), and suggest an improved commercial economy – people are buying more, making more and shipping more. Commercial occupancy is at 97.6 – nearly back to where it was in 2005.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLDAO9tl0P5-oVdbmGj0LoD_I3JgtxIqMmMU-aIShWv7pex1l4GwGp_78TOGgXIB4wc5M42jtm-VUmiVX15An1zDMXn1ummsWHsmKdKPtxVsc4L0G5xLA06kECsvtKwSLRHgRdzcnyJCM/s1600/ColliersInternationalLasVegas_SouthernNevadaCRERecoveryIndexYoYCategory_Sep2015_JohnMStater.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="459" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLDAO9tl0P5-oVdbmGj0LoD_I3JgtxIqMmMU-aIShWv7pex1l4GwGp_78TOGgXIB4wc5M42jtm-VUmiVX15An1zDMXn1ummsWHsmKdKPtxVsc4L0G5xLA06kECsvtKwSLRHgRdzcnyJCM/s640/ColliersInternationalLasVegas_SouthernNevadaCRERecoveryIndexYoYCategory_Sep2015_JohnMStater.png" width="640" /></a></div>
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The current weakness in the local economy comes from a lack of population growth. The Driver’s License Count is now at 73.9, indicating that migration into Southern Nevada is now at about 70 percent of where it was during the boom. The strongest migration into the area came during the winter of 2003 (and in fact, in-migration always seems to spike during the winter). More significantly, the Driver’s License Count averaged 89 during the mid-to-late 1990’s, so we’re now getting far fewer people moving into Southern Nevada. Migration was actually even stronger a few years ago, in 2012, than it is now.<br />
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When you consider the recovery we have seen in taxable sales without the influx of new people into the Valley, you realize how much the local economy actually has recovered, and how much stronger that recovery would be with continued strong immigration into Clark County. The real loser from this lack of population growth has been New Home Sales. That number now stands at just 22.8 – we’re selling approximately 23 percent as many new homes now as we were in 2005, and about a third as many as we were in the 1990’s. <br />
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The local economy has come a long way since the depths of the Great Recession, but new home sales and migration into Southern Nevada are still mired in the Great Recession. Perhaps this is the new normal. The key point is that despite population growth and the residential construction industry, two former pillars of the old normal, being so weak, Southern Nevada’s economy is close to reaching the strength it had before the Great Recession hit. This change to the “new normal” has been accompanied by changes in the demand landscape of the commercial real estate sector. For example, warehouse/distribution in particular and industrial in general is in high demand, while office and retail users are finding new ways to maximize their use of space (i.e., they’re doing more with less). Getting to know the “new normal” and what it means for your clients and their real estate needs is key to your success as a broker.<br />
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John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-196483615422582382015-03-12T11:05:00.001-07:002015-03-12T11:05:08.552-07:00The Impact of Cheaper Fuel<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHnNHniXFbPqQ5IXnUmAbKEY5mq5UkckxYSYP0hYI3Zw_NRyUCyeS2f1lzjM4SvlU8LN8Q0Ov2i00J9dTruIXCX-iqztJOf2xCfYT_-PJTR0g1XRPMvvq6mVpSfP3ESqVhyphenhyphena5mRDyzkNM/s1600/gas.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHnNHniXFbPqQ5IXnUmAbKEY5mq5UkckxYSYP0hYI3Zw_NRyUCyeS2f1lzjM4SvlU8LN8Q0Ov2i00J9dTruIXCX-iqztJOf2xCfYT_-PJTR0g1XRPMvvq6mVpSfP3ESqVhyphenhyphena5mRDyzkNM/s1600/gas.jpg" height="337" width="400" /></a></div>
Will lower fuel prices cause a spike in visitation to Vegas this summer? More importantly, will lower fuel prices give a boost to commercial real estate?<br />
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Generally speaking, when prices fall, people buy more, and when they rise, they buy less. Nothing ground-breaking in that statement, and suggestive that lower fuel prices will mean more people driving and flying to Las Vegas in 2015. But let's take a closer look before we commence dancing in the streets.<br />
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According to AAA, Las Vegas’s average gas prices have fallen by from $3.44/gallon one year ago to $2.896/gallon today, a drop of $0.544. Los Angelino’s have seen a $0.52 drop in gas prices, year-over-year. Let's assume a $0.53/gallon drop in fuel prices. The trip from Los Angeles to Las Vegas is about 270 miles. The average car in the United States gets about 21 miles to the gallon, so with the current savings in gasoline prices, you can now make the round trip with a whopping savings of ... $14! I cannot imagine that many road trips to Vegas have been derailed for the lack of $14. Some have, I'm sure, but probably not many. I also wouldn't bet on airfares dropping too much either. Airlines do not seem too generally not inclined to pass savings on to their passengers these days unless they absolutely have to. I don't think lower gas prices will have a major impact on visitation to Southern Nevada.<br />
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The effect of lower fuel prices on local consumers is where the potential for a benefit lies. Less money spent on gasoline means more money available for other things, the likely beneficiary being non-gas station retail stores.<br />
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In 2014, gas stations took in an average of $23.8 million per month. In of 2013, gas stations took in an average of $23.6 million per month. So, Las Vegans spent an additional $0.2 million per month at gas stations, year-over-year, while fuel prices dropped an average of $0.11 per gallon. Not suggestive of money flowing away from the gas stations, and lower prices at the pump may stimulated non-fuel spending at the convenience stores connected to gas stations, keeping that money "in the family".<br />
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Other retail stores took in $1.436 billion per month in 2014, versus $1.348 billion per month in 2013. So, Las Vegans spent $88 million more per month in other retail stores in 2014 than 2013. Perhaps this represents more spending on retail because of lower fuel prices, but then perhaps not.<br />
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The big retail boost in Las Vegas was in nonstore retail (i.e. online and, presumably, mail order sales). Now, these numbers are for such businesses paying taxes in Las Vegas, so the money spent does not necessarily come from Las Vegans. Still, taxable sales in nonstore retail climbed from a monthly average of $30.7 million in 2013 to $48.3 million in 2014, an increase of $17.6 million per month.<br />
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Many interesting figures, but nothing solid to indicate the impact these lower fuel prices might have on non-fuel related businesses in Southern Nevada. Let's take a different tack. Imagine if the percent reduction in fuel prices from March 2014 to March 2015 (16.3 percent) translated in a 16 percent reduction in spending at gas stations. That would free up $45.7 million dollars, annually, to be spent in other sectors of the economy. That represents just one-tenth of one percent of the total taxable sales in Southern Nevada in 2014 ... and it's probably significantly more money that will actually move from gas stations to other retail. <br />
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My prognosis: Don't expect any major impact on commercial real estate from the lower fuel prices we are not experiencing. Fortunately, commercial real estate is in a recovery, and it now appears to be a solid, sustained recovery. A boost from lower fuel prices would be welcome, but at this point it is not necessary to keep commercial real estate growing.<br />
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JMSJohn Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-35874481729256859322015-02-10T08:45:00.003-08:002015-02-10T08:45:38.476-08:00Real Estate Among the Bubbles<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkEwnpgZTNsXHBm4fcUEsi4R7gjOzUFlw-8OHtikhuuyEtvGW3ZsCfF1OXMLHjxAzdGM2yi3V2v2xMtALOKG3B6CRNJygjRNqJGBNamUw468Q29ME9DNSKKI20lla3SfpELbo7C2fD638/s1600/500full.jpg" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkEwnpgZTNsXHBm4fcUEsi4R7gjOzUFlw-8OHtikhuuyEtvGW3ZsCfF1OXMLHjxAzdGM2yi3V2v2xMtALOKG3B6CRNJygjRNqJGBNamUw468Q29ME9DNSKKI20lla3SfpELbo7C2fD638/s1600/500full.jpg" height="240" width="320" /></a></td></tr>
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Commercial real estate does not exist in a bubble. A well-worn phrase, yes, but what does it mean? In this instance, it means that commercial real estate is one of a spectrum of investments, and must compete with all of the other investment vehicles out there – stocks, bonds, <a href="http://en.wikipedia.org/wiki/Hummel_figurines">Hummel figurines</a>, scarves bearing the sweat of the sainted King of Rock n Roll, etc. – for the money of investors. In other words, it’s not enough that you’re selling the best Class B office property investment in Las Vegas, or even in the world – that office building must compete with every other investment vehicle in the world as well. On some level, your building needs to compete with Microsoft stock, pork bellies and Elvis' scarf.<br />
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Why is this important? Because the goings-on in those other investment worlds has an impact on Southern Nevada’s commercial real estate. We might wonder why more money isn’t flowing into Southern Nevada’s CRE market when that market appears to be on the mend, but if you consider all the other places that money could go, its absence in our market is not so surprising. If investors can make more money in stocks, money is going to flow into stocks. If they can make more money in commodities, money will flow into commodities. Granted, the time frame of the investment matters as well, as does the investor’s expertise in various investment vehicles – an investor who knows commercial real estate, but who doesn’t know a pork belly from a jelly belly might not want to put money in commodities, even though that market might, on paper, look better than commercial real estate. Still, in aggregate, investment money tends to go where the yield is best.<br />
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At the moment, yield appears to be hanging around those aforementioned stocks and commodities. Why? There might be numerous reasons, of course, but the loose money policies pushed by central banks is probably one of those reasons. All of that money must go somewhere, and the folks placing it want to realize a profit on their investment now, rather than later. Commercial real estate is usually a “later”, not a “now” in terms of investment. If we are in a deflationary mode at the moment, long term investments like real estate are more attractive. If inflation is looming on the horizon, as some people fear, those long term investments are less attractive.<br />
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Still, things do change. The latest intel suggests that stocks and commodities might be overvalued. Some corporations are taking on cheap debt to make themselves look more profitable than they really are, thus goosing their stock value. As with all unorthodox business strategies, some businesses are going to get away with it, others will not. Eventually that debt must be paid. Meanwhile, Japan’s central bank seems to have decided that Thelma and Louise had the right idea, and it’s now going pedal to the metal towards one heck of a cliff. The term kamikaze might be politically incorrect in this context, but it is probably appropriate nonetheless. What Japan is doing now will lead to currency wars in Asia and then worldwide, and then who knows? Our own Janet Yellen seems determined to keep things loose in the U.S. of A., but Fed chair-people don’t often serve for long these days, so there’s always the possibility that three years from now, our own central bank may start tightening things back up (then again, maybe not – we should be overdue for a cyclical recession right about then). <br />
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The point is that if commercial real estate is not the most attractive option today, it might be tomorrow. If you see the stock and commodity markets turn bearish, expect to see the smart money head once again towards the commercial real estate market (except for the smart money that’s shorting those other markets). Hopefully this shift, if it occurs, will occur while Southern Nevada’s market still looks healthy, so we can capture a share of that money. Listen to your clients and understand their investment strategy, and where commercial real estate might fit in. Property prices are still relatively low in Southern Nevada, and that should make them more attractive to long-term investors. Short term investors are probably slowing down for the time being, unless we see that new wave of foreclosures finally break on our shores.<br />
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Oh - and when you see the stupid money head into commercial real estate, cash in your chips and batten down the hatches, because it means our 3 hour tour is just about over.<br />
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JMSJohn Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-2897918628498830282014-12-15T09:43:00.004-08:002014-12-15T09:43:49.592-08:00Moving Targets<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
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<tr><td class="tr-caption" style="text-align: center;">Are traditional doctors offices going the way of house calls?</td></tr>
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Think of the economy – any economy – as a river. A river is just water that is moving from a higher elevation to a lower elevation. If anything gets in its way, the water moves around it or, eventually, through it. There’s no thought process involved, or the act of a higher power. Water is driven by gravity to be as low as it can be.<br />
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Economies are likewise driven to be efficient. Producing the most possible at the lowest price. Why? Because human beings demand it. There is almost no end to what human beings want, and therefore producers want to produce as much of something as they can, and consumers, who have so many desires, want to pay as little as possible. Ultimately, the marketplace is where consumers and producers meet in the middle.<br />
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Human beings can erect dams to manipulate the flow of water. Note that I said manipulate, not stop. The water cannot be stopped. Hoover Dam forces water through channels to spin dynamos, but it doesn’t stop the water from flowing. Other dams force the water into fields to irrigate crops, but they do not stop the water.<br />
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Likewise, human governments can erect regulations, taxes and other such things to manipulate the flow of an economy. They can make something artificially cheap or expensive, but eventually the market will, by hook or by crook, work around those artifices to put the product at the market price.<br />
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I’ve recently <a href="http://www.healthcarefinancenews.com/news/top-10-healthcare-issues-watch-2015#.VIuE1lzDwFI.linkedin"><b>read an article </b></a>about innovations in healthcare. The supply of healthcare is, like a river, finding a way around artificial impediments. Because the old way of delivering healthcare, via individual doctors and surgeons, has been made artificially expensive with cost-sharing "health insurance”, producers and consumers are finding a way to “meet in the middle” with medical groups, do-it-yourself treatment aided by handheld computers (let’s stop calling them cell phones – they’re really so much more), health clinics, etc.<br />
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At the moment, the victim of this market-driven innovation is medical office space. Medical office space was designed to serve the old market of doctors and patients. At the moment, it is being negatively impacted by the change in healthcare delivery – a change initiated not by the free market, but by large public and private institutions. <br />
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Will we, at some point, return to a more traditional model? Perhaps. As healthcare delivery moves away from the very institutions that sought to dominate it, they will have to adapt or die. In the meantime, medical office will have to adapt to the new way of doing things. It may do this by clever redesigns to serve medical groups and health clinics, or by repurposing itself to other uses. Thus the ebb and flow of commerce continues. Keep this in mind when dealing with developers and building owners. The consumer (in this case potential tenant or buyer) is always a moving target, and forces much larger than they are driving that movement. Spend some time understanding the macro-economy to better understand the micro-economies you deal with when you represent a landlord or tenant.<br />
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JMS John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-9753271803955509982014-05-22T08:32:00.001-07:002014-05-22T08:32:51.721-07:00Art and ScienceThey say that economics is an art as much as a science. This is actually a fancy excuse for why economists have to spend so much time finessing and guessing – the truth is, there’s more information out there than we know or can know, and so we have to collect what we can, when we can, connect the dots, and present the most complete picture possible of the current state of the economy, and where it might be headed.<br />
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For the past seven years (!) I’ve maintained an economic index called the Commercial Real Estate Recovery Index. I use it to predict near future demand for commercial real estate in Southern Nevada. To look at now, you might not guess that Southern Nevada is kicking ass at the moment, economically speaking.<br />
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Looking at the index, we find year-over-year growth in most of the data points that make up the index, especially port traffic in Los Angeles (not a key data point, I grant you, but it does show 11.2 percent growth year-over-year, and some of that cargo makes its way to and through Southern Nevada), taxable sales (6.8 percent growth y-o-y), and employment (3.2 percent growth y-o-y). Only one measure is tanking at the moment, and it is unfortunately an important one: New home sales are down 21.8 percent from one year ago. Since 2010, the index has grown by an average of 0.2 percent per month. <br />
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We have positive growth, but not wildly positive growth. So why am I saying that the economy is kicking ass? Because the numbers do not show everything. The jobs data collected by the state, for example, is “establishment based”. This means that the data gatherers poll a variety of existing businesses and ask them whether they’re hiring or firing. Based on their responses, the state decides how many jobs were likely created and/or destroyed, and comes up with a number. What this process does not capture, of course, is jobs created in newly created businesses.<br />
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Using a new method of allotting jobs by industry into the different sectors of commercial real estate, we get the following job picture:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4gWD3JvNXEN8QhKxGXCf-rt0X9_4XSCBUU3tsbH8iNs1OmiqhUGjnGh-YfwBjMYwmFfTiEa_s5ote63PMGYyTMiMx9P05yhDAHDDP0JjvWW8sYmwt_-_Wf0CWS2WaIBZuXYEVaPnn6GY/s1600/EmploymentTrends_JohnMStater_ColliersInternational_LasVegas.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4gWD3JvNXEN8QhKxGXCf-rt0X9_4XSCBUU3tsbH8iNs1OmiqhUGjnGh-YfwBjMYwmFfTiEa_s5ote63PMGYyTMiMx9P05yhDAHDDP0JjvWW8sYmwt_-_Wf0CWS2WaIBZuXYEVaPnn6GY/s1600/EmploymentTrends_JohnMStater_ColliersInternational_LasVegas.png" /></a></div>
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A few take-aways from this graph: 1) The recession hurt different sectors to different degrees, and those sectors responded to that pain in different degrees. The industrial sector took the biggest hit in terms of lost jobs, but the industrial real estate market is in much better shape than the office market, which already appears to have regained the jobs it lost during the recession. 2) Employment in the different sectors peaked at different times - industrial first, then professional office, and finally retail. Medical office employment flattened for a brief time during the recession, but didn't actually peak until 2013 - I can't imagine what might have caused that. 3) Industrial jobs - really construction jobs - have stubbornly stayed lost during the recovery, while professional office jobs seem to be back to their pre-recession level and retail jobs have surpassed their pre-recession level. Unfortunately, this job recovery has not been matched by an "occupied square footage" recovery - this suggests a transition in how space is being utilized. <br />
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<a href="https://draft.blogger.com/blogger.g?blogID=1485471530682345868" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>The problem with the paragraph above, though, is that it takes for granted that the employment picture it depicts is completely accurate. Alas, it is not. <br />
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What the graph above does not capture – the “known unknown” – is how many jobs are being created in newly created businesses. Here, I have to fill in the blanks with my own anecdotal knowledge of the amount of lease and sale activity I’m seeing while I update my database on a daily basis. I don’t have this information dropped into a spreadsheet and calculated and analyzed yet, so I cannot offer any concrete numbers, but my impression is that new business creation is high and it is this new business creation that is driving commercial real estate activity at the moment.<br />
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Thus, the numbers we have look pretty good, but I believe the numbers we don’t have look even better, and therefore, using a little finesse and guess, that Southern Nevada’s economy is in better shape than the current numbers suggest.<br />
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Of course, I sincerely hope now that I've said this that an “unknown unknown” doesn’t pop up and make me eat crow.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-81915234301867150382014-02-26T08:28:00.001-08:002014-02-26T08:28:08.710-08:00The Eyes of the Nation Are Upon Us<br />
During the boom years, the mantra for many large, national corporations was “You have to be in Vegas” – especially if you were in the retail business. The Valley was growing at a remarkable pace, and all those new customers were irresistible to big business.<br />
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Then 2008 happened, and the passion really left the relationship.<br />
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During the Great Recession, Southern Nevada lost jobs, residents and, of course, dollars. As incomes dropped, in both size and number, Las Vegas lost its luster in the eyes of big business. This reversal of interest was inevitable, given the circumstances, but it didn’t happen overnight. <br />
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As far as two years into the Great Recession, national companies were still taking space in Southern Nevada – perhaps because their competitors were going out of business and leaving gaps to be filled, and because rents were dropping fast. In 2009, we recorded lease comps in Southern Nevada totaling 2.4 million square feet by companies with national or international reach. This fell slightly to 2.3 million square feet in 2010, and then dropped significantly in 2011 and 2012, averaging about 1.8 million square feet in each of those two years.<br />
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In 2013, the tide changed, and national companies took 2.1 million square feet of space in commercial projects (again, in comps we had access to, and in projects we track). Most of this space was in Warehouse/Distribution, which ranked #1 in demand in each of the past five years. This has more to do with the nature of Warehouse/Distribution space than anything else – not only are Warehouse/Distribution units larger than other commercial units, they also dominate in the logistics roll, a roll for which national companies have a demand in Southern Nevada.<br />
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Light Distribution projects ranked #2 in demand by national companies, with companies leasing 274,000 square feet in those properties. Retail, primarily Power Centers, came in at #3 with 253,000 square feet of leases, and Professional Office rounds out the top four, with 177,000 square feet.<br />
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Each of these product types has seen a different demand trend over the past five years. Warehouse/Distribution saw higher demand in 2009 and 2010 than in 2013, and much lower demand in 2011 and 2012 than in 2013. Demand for Light Distribution has been very stable. Retail demand has increased steadily from 2009 to 2013. Professional Office space has seen demand by national companies steadily decrease from 2009 to 2013, by 61.9 percent to be precise.<br />
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If this is the space that national companies want, is Southern Nevada going to be able to meet this demand over the next two years? In the case of Professional Office, with demand steadily decreasing and 11 years of supply on the market, there shouldn’t be a problem. Retail is also probably secure, with six years of supply on the market in the retail category, and much of this in the form of big boxes. Things get dicey, though, when we consider distribution space. There is about 7 months of Warehouse/Distribution supply, and 2.4 years of Light Distribution supply on the market. Meeting the demand of national, regional and local companies for distribution product will be difficult unless companies can afford the time required to build their own facilities, or speculative construction begins soon.<br />
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JMS John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-45247044440559822882014-01-21T09:05:00.000-08:002014-01-21T09:05:59.567-08:00Bucking the Trend<br />
A new year has dawned, following a year of uneven progress for the real estate market. The industrial market had its best year in five, retail kept its head above water and tallied up its third year of positive net absorption, and office managed a decent year all the while looking about as appealing as Mylie Cyrus with a foam finger.<br />
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The underlying economic fundamentals of 2013 were uneven as well, but positive overall. I’ve already written about the trend in Southern Nevada's Napoleonic economic cycle of attack in the summer and retreat in the winter (yes, I hate myself a little for that Napoleon bit, but my father paid for a history degree so I need to use it), so now we need to see if that trend is holding.<br />
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Economic data never arrives as quickly as we would like it (“we” being people who have to think and write about economics - I'm sure the compilers of economic data think it comes plenty fast enough), but the numbers for November 2013 are finally filing in to be counted and analyzed. If the trend we discussed last time holds, we should see the CRE Recovery Index leveling off or dropping off in November.<br />
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And now for the good news –<br />
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November’s index number was actually up! In November, the index reached 95. This is the highest number we’ve seen on the index since December 2008, and that was when the index was plunging (it would be 93 the next month, and 86 six months later). In general, 2013 saw the index take a small step back in February, level off for a few months, and then begin to grow in June, with that growth continuing through the summer, fall and winter. December numbers are not all in yet, but when we look at the numbers that are in, and if we assume those that aren’t in at least stay stable, the index number for December 2013 should remain at 95.<br />
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What does this mean? It means that 2013, at least the latter half of 2013, was a pretty solid year. It’s no surprise that it was a year that generated pretty strong performance in the real estate market. We might be seeing the winter lag coming in December and maybe January, but if the region is able to build in 2014 on its reasonably good performance in 2013, we should see continued recovery in the real estate market through 2014. Based on last year’s performance, the trajectory of the retail market is the one to watch. Retail went negative at the end of 2013 after three years of positive net absorption, and this negative turn is taking place just as speculative construction is returning to the retail market. Whether those new projects will stimulate or cannibalize the existing market will be very interesting! <br />
<br />John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-91225785587675545822013-12-03T09:06:00.000-08:002013-12-03T09:06:14.236-08:00CyclesIf we had been waiting for the “year of recovery”, the year local economy was finally going to turn around, 2013 is probably it (and I mean that the way it sounds – yeah, 2013 is probably about the best we can hope for). The year has been bery bery good to commercial real estate, and the wider economy has seen some improvement, though not nearly as much as we would like.<br />
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Looking at 2012, we saw a year with faster improvement in the first two-thirds of the year, and then a slow-down and fall that lasted into 2013, essentially erasing all of the year’s earlier gains. When things began turning around in 2013, the question was – will it last?<br />
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Now, economies work in cycles (and cycles within cycles, and cycles next two cycles that sometimes correspond, which in itself is another cycle), and cycles don’t necessarily work within the parameters of human defined time. After all, some day had be chosen as the first day of recorded time, and that choice was ultimately arbitrary. If you peruse the accompanying graph, you can see a pretty fair example of these cycles in the CRE Recovery Index (which I’ve now extended back to 1995). From 2002 to 2007, you can see the index peaking in October of each year, and then retreating from November to March or April, before rising yet again. <br />
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Even during the crash years from 2008 to 2010 you can see small peaks each October, though obviously during those years growth in the index never lasted for more than two or three months, followed by very sharp declines.<br />
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By 2010, the normal cycle had once again reasserted itself. Growth in the index was not as smooth and stable, but did generally follow the pattern outlined above, though with weaker growth and sharper declines than during those halcyon days of old.<br />
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What does this mean for 2014? Well, if the pattern holds, it is likely we will see the index begin to retreat in November or December. This retreat will last through the first quarter of 2014. In 2012, the measures that caused the index to tumble were Visitor Volume, New Residents and Los Angeles Port Traffic. In 2011, it was Visitor Volume and Los Angeles Port Traffic. In 2010, it was New Home Sales, Visitor Volume and Los Angeles Port Traffic. Do you see the pattern?<br />
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We can assume that Visitor Volume and LA Port Traffic are going to begin to fall in the very near future. At the moment, they remain strong. Their retreat is cyclical, and thus normal and nothing to fear. If they perform better than expected, then so much the better. <br />
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The questions we need to grapple with, then, are as follows: 1) Will there be other measures of the local economy that will suffer during the inter-year lag months? 2) Were the growth months in 2013 strong enough to keep us on a better footing after those months of retreat. <br />
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My guess is that we will not see any other measures of the economy enter into retreat along with Visitor Volume and Port Traffic, and thus when the Spring thaw reaches us in 2014, we will find ourselves in a stronger position than we had been in 2013, and well on our way towards what we might term a “complete recovery”. I think I see the light at the end of the tunnel.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-2234524368356675712013-10-30T09:11:00.000-07:002013-10-30T09:11:44.603-07:00What Exactly Do We Mean By Recovery?Declaring that an economy has recovered, at least in the context of the latest recession (you might have read about it – it was in all the blogs), is a tricky undertaking. Are we counting “recovery” as a return to the economy at the peak of the bubble, at where it was before the bubble began, or at some guess at where it would have been without the bubble?<br />
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Aside from the timing, what are we waiting for to recover? If it was just a matter of visitor volume, Las Vegas finished its recovery last year. Since I'm a commercial real estate researcher working for a commercial real estate firm (Colliers International, to be precise), do I need commercial real estate to fully recover before I declare the local economy recovered?<br />
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For the purpose of this article, I offer two definitions of recovery. A recovery will:<br />
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• Bring the local economy back to a point before the beginning of the bubble (circa 2005)<br />
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• Use an index of the following measures of the local economy – New Home Sales, Commercial Occupancy, Gaming Revenue, Visitor Volume, New Residents, Employment, Taxable Sales, and Port Traffic in Los Angeles (this is the Recovery Index I have been using since 2009)<br />
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Using these definitions, Southern Nevada’s economy had an index value of 100 in January 2005. The index reached a peak of 109 in October 2006 and a trough of 83 in April 2010.<br />
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At this trough, Southern Nevada's economy reached an index value it hadn't seen since its last recession in 2001/2002 - essentially erasing 8 years of economic growth. It is entirely possible that the growth we might have seen during that period, had there been no economic surge, is gone forever. One could argue that, sans the surge, the economy would have an index value of 110 now, an index value we're about 5 years away from reaching at the current rate of growth, which isn't negligible.<br />
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If we look at index growth in 5 year periods, we see the following:<br />
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1996-2000 = 26.2% (5.2% average annual growth)<br />
2001-2005 = 19.4% (3.9% average annual growth)<br />
2006-2010 = -17.5% (-3.5% average annual growth)<br />
2011-2013 = 9.4% (3.1% average annual growth)<br />
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Current index growth is about 80% of what it was in 2001-2005, and 60% of what it was in 1996-2000. Growth in the last three years is about at 90% of the negative growth experienced in the "plague years" of 2006-2010. If we wanted to erase the effects of the Great Recession, we would need to more than double current rates of growth, a situation unlikely without an explosion in construction activity in Southern Nevada.<br />
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Where is Southern Nevada today in terms of getting back to where it was in 2005, what one might call a "do-over recovery"?<br />
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In September 2013, Southern Nevada’s economy has an index value of 94, so not recovered yet, but not so far off. In 2012, the index value started at 89, increased to 93 by November 2012, and then it started to fall. From February 2013 to May 2013, the index value stuck at 91. Growth began in June and has continued since. If economic growth in the next few years matches the growth pattern of 2012/2013, Southern Nevada’ s economy should finish recovering by October of 2016! <br />
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Could the recovery move more quickly? Naturally. The economy was stronger in 2011 than it was in 2012 and has been in 2013, so it is certainly possible for the economy to recover at a faster pace. If we were to assume economic recovery on pace with 2011, Southern Nevada would have finished its recovery in July 2015 – better, but nothing to crow about.<br />
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Given the two possible rates of recovery described above, it seems reasonable to assume that Southern Nevada’s economy, and specifically its commercial real estate market, have at least two or three more years to go before they can be said to have recovered to a pre-recession level. Simply put, Southern Nevada is not currently making up the ground it lost during the Great Recession.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-15750990805425034162013-10-01T10:50:00.000-07:002013-10-01T10:50:23.721-07:00Happy Days Are Here Again ... I Hope<div class="separator" style="clear: both; text-align: center;">
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The human mind is a funny thing, not only because it apparently has the consistency of chilled pudding, but also because of the way it snaps between despair and ecstasy (though bear in mind that ecstasy is a strong term for what I’m about to discuss).<br />
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I was under the impression that net absorption was going to be lower in the third quarter than it turned out to be. It is good news that it wasn't, and though I’ve been a little leery about the industrial market due to weak job numbers and the large impact of build-to-suit projects on that net absorption, I’m almost ready to declare the industrial market completely healed, throw the confetti, toot the horn and start being an optimist.<br />
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When a person is expecting bad news, good news has a greater impact on their mood than it would have had had they been expecting good news. The reverse is true as well. It’s important for us to check our optimism and pessimism at the door when prognosticating, and instead look at the data and the trends it suggests, draw on our experience with past trends, and come to a reasonable conclusion. <br />
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A full year before the beginning of the Great Recession, I noticed that industrial vacancy rates were on the rise. Gross absorption was slipping a bit, but we were adding tons of new space that was not pre-leasing well. While the trends suggested to me that demand was flagging, the market had conditioned itself to expect strong demand, and proceeded on that assumption. Why let the facts get in the way of a good story, after all. That being said, I certainly did not expect demand to suddenly fall off a cliff at the end of 2007.<br />
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Now we’ve been engaged in the Great Recession for nearly six years. Gross absorption is healthy but not really on the increase, but net absorption is very strong, suggesting that existing tenants are no longer downsizing or closing their doors. The lack of new industrial jobs would tend to corroborate this impression on the market, as a lack of closures and downsizing does not necessarily translate into job growth. This is good news, and yet I’m having a hard time expecting it to continue.<br />
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So, what’s the story in Southern Nevada’s commercial real estate markets? As much as I fear admitting it, I think Southern Nevada has finally entered the recovery phase (I’m crossing my fingers right now hoping that the fourth quarter doesn’t make me look like an idiot). While job growth is not terribly strong (though this might have something to do with how the data is collected), most economic measures are leveling off or improving, and the real estate numbers have been pretty strong across the board.<br />
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The industrial market looks poised to absorb more space in 2013 than it absorbed through the entire Great Recession, and if net absorption remains somewhat constant, the industrial market will be ready for new speculative construction in about 12 months. Retail has been in positive net absorption territory for about two years, and though office is still seeing declining asking rents, its net absorption has been pretty strong for the past year-and-a-half. Office is not doing well in 2013, but that has something to do with continued weakness in the financial services sector (including real estate) and the health sector (health services companies tend to take space in professional office space more than medical office space these days, much to the regret of medical office landlords).<br />
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Office notwithstanding, the Great Recession appears to be over. Go ahead and throw some confetti - get it out of your system - and brace yourself for 2014.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-39140075640320742192013-09-23T14:59:00.004-07:002013-09-23T14:59:57.422-07:00Any Diversification Today?In today’s post, I want to examine how the landscape of commercial real estate had changed over the past three years in terms of tenant industry (i.e. what line of business the tenants were in). This is new ground for me, so I decided to begin with the industrial market, examining what share of industrial lease and user sale activity different industries held.<br />
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If you think this graph did not help increase my understanding of the situation, you are correct. Different industries have, on a quarter by quarter basis, had their ups and downs, but the only industries to show a trend were manufacturing and construction, and those trends were pretty slight.<br />
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To get a better handle on the situation, and gain some context, I decided to abandon my relatively small sampling of lease and sales activity data for a much broader store of data – employment.<br />
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When we look at jobs in Southern Nevada, we see surprisingly little change over the past twenty years in the share of jobs between different sectors. The only significant changes have been in the construction sector and leisure and hospitality sector.<br />
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The construction sector held 9 percent of the region’s jobs in 1994, swelled to a colossal 12 percent in 2005/2006, and has now fallen to just 6 percent of the region’s jobs. While a farmer with nine cows and one pig could create the illusion of farmyard diversification by killing eight of his cows, he certainly would not be better off than when he started. Having 2,000 fewer construction jobs now than in 1994 has not improved economic diversification in Southern Nevada.<br />
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The leisure and hospitality sector, on the other hand, has added almost 107,000 jobs over the past 20 years, but has seen its share of the job market shrink from 35 percent to 32 percent. Perhaps this is not a massive drop, but one that is indicative of some diversification of employment. Over the same period, the share of employment in the professional and business services sector and the education and health sector have both increased by 3 percentage points. Again, this may largely be a matter of the draw-down in construction jobs, but both sectors have shown percentage growth in excess of 140 percent over the past twenty years, adding a combined total of 113,900 jobs. It seems likely that the leisure and hospitality sector has lost some of its employment share to these two service industries.<br />
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This may not be the diversification some folks want, but it’s the diversification we have for now.John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-24389009013322605822013-07-24T09:34:00.000-07:002013-07-24T09:39:49.563-07:00Once Bitten, Twice ShyAfter surviving an impressive housing bubble that burst just 5 years ago, many Las Vegans are eying the current housing recovery with a suspicion. The sales figures look good, but with prices increasing by 20% or more year-to-date, are we just entering a new housing bubble? <br />
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First, let’s examine the market of yesterday and the market of today. In the period 2005 to 2007, Las Vegas saw an average of 2,625 new homes sell per month, while the median price of a new home increased 5.8 percent over that period. In the past twelve months, new home sales have averaged 573 per month, and the median price of a new home as increased by 11.5 percent. So, obviously, even if a bubble is forming now, there is a magnitude of difference in scale between what was occurring then and what is occurring now.<br />
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The activity of investors is often pointed to as another similarity between then and now, but this is not quite so. The investors that caused heartache a few years ago were often over-leveraging themselves to buy homes that they thought they could re-sell at a tidy profit in just a few months. Unfortunately, they discovered that the amazing price increases they were seeing were all due to the activity of other investors, and even with very low interest rates and the willingness of traditional home buyers (or lack of knowledge) to borrow far more than they could afford, the investors priced the occupiers of homes out of the market, found they could not keep up their mortgage payments, and the market collapsed. Home builders, working feverishly to keep up with the perceived demand, built many more houses than were needed, and thus the housing crisis and the Great Recession.<br />
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How are things different today? The investors of today are not the investors of yesterday. Having spoken to people within the housing industry in Southern Nevada, I have found that the individual investors of today are coming in with plenty of cash and are not over-leveraging themselves to buy investment homes. Moreover, many of the investment sales we are seeing in Southern Nevada today are by institutional investors, buying hundreds of units, often directly from banks.<br />
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How are things the same? When housing sales are driven by investors, they leave a gap in the market. From the perspective of home builders, a house sold is a house that is off the market. In fact, though, an empty house is still effectively on the market. When tracking commercial real estate, vacancy is the thing that matters! An investment property must eventually pay for itself, either by means of rent paid by an occupant, or by the value of the property appreciating past the value of the loan taken out to buy the property in the first place. The last bubble was driven by such appreciation of value, not by renters occupying houses, but the appreciation could not keep pace with the prices being paid for houses.<br />
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More importantly, when home builders saw houses selling a few years back, they took it as a sign that more houses were needed. Home builders today are gearing up to begin building houses in earnest once again in 2014. The question is whether they are building for investors or for occupants? Unfortunately, the vacancy rate for single-family homes is notoriously hard to determine, with different groups (the U.S. Census Bureau being one) coming up with wildly different numbers. This is unfortunate, because it would fill a crucial gap in our knowledge of the home market.<br />
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One clue to whether Southern Nevada is once again getting ahead of itself might be found by comparing household growth in Clark County (based on information from the Clark County Demographer and Claritas) to new home sales (based on information from Dennis Smith’s Home Builders Research). Demographic data from Claritas states that 42.9 percent of households in Clark County rent homes or apartments rather than own single family homes or condos, so we’ll adjust the household growth figures by 43 percent to get a better idea of how many buyers were entering Clark County each year.<br />
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What does this graph tell us? First and foremost, in-migration into Southern Nevada dropped sharply in 2008, 2009 and 2011, but has generally been on the rebound in the past two years. Second, we see that new home sales decreased substantially in 2007, at the beginning of the housing crisis, and continued to plummet in 2008 and 2009; in 2012 they began a slow recovery.<br />
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In 2005 and 2006, Southern Nevada was selling approximately three times as many new homes as it was adding new households that were likely to own homes. This suggests that most of these new homes were purchased by investors rather than occupants. The percentage declined in 2007, reaching what would be the lowest percentage in the nine years covered by this chart. In 2008, the first full year of the Great Recession, almost five times as many new homes were sold as new households moved into Southern Nevada, despite a steep decrease in the number of new homes sold. Since 2009, Southern Nevada has gained an average of 1,300 households per year and sold an average of 5,400 new homes per year, again, more than 4 times as many new home sales as new households likely to own rather than rent entering the region. <br />
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In 2013, Clark County is projected to expand by 3,200 households and sales, if they remain steady, should reach 7,200 new homes, approximately a 2:1 ratio. While this is not as high a ratio of new home sales to new households as recorded in 2005, 2006 and 2008, it is higher than in 2007 (when the market began to cool), 2010 (when the federal government juiced the housing market) and 2012. This suggests that investors once again are beginning to dominate the housing market. Fortunately, they are buying new homes at lower prices (28 percent lower) than they were in 2005, but the median price of a new home has increased by 13 percent in the past five months. While this is good for house flippers (though we know how that story ends), it is bad for owner/users and problematic for landlords, as they must still compete with multi-family projects and cheaper, existing homes that are on the rental market. <br />
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If Southern Nevada’s population was expanding more rapidly, and if the median new home price was expanding much more slowly, I would feel more comfortable about the current expansion in new home sales. As it stands, home builders must be very careful about new home construction in 2014, as they might once again find themselves building more homes than they can sell if investors once again cool on Southern Nevada.<br />
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<br />John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-53127124568795220072013-06-11T13:12:00.003-07:002013-06-11T13:12:36.392-07:00Vegas Enjoys the Spring ThawWaaaay back in November of 2012, the Las Vegas economy, which had been in growth mode for a good 10 months, decided to take time off for the holidays. What followed, in terms of the CRE Recovery Index I maintain, was a pretty rapid slide, from an index value of 91 (a value of 100 represents the economy as it was in January 2006 – i.e. the “good old days”) down to 86, roughly the value we had in December 2011 just before the 2012 growth spurt began.<br />
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In March, though, the index began to grow again, and in April 2013 it stands at an 89, not far from the 2012 high and well above the low of 80 recorded in March 2010 at the low-point of the recession.<br />
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On a year-over-year basis, the following components of the CRE Recovery Index have posted growth, going from the highest growth to the lowest: New Home Sales (76.6 percent growth), Clark County Taxable Sales (5 percent growth), Gaming Revenue (3.1 percent growth), Employment (2.2 percent growth) and Commercial Occupancy (1.8 percent growth). With the exception of new home sales, we’re looking at very moderate growth in the economy. Depending on who you speak to, new home sales are either going to maintain their dynamic growth, or they’re at the end of it, but for now they are definitely driving the CRE Recovery Index higher. If new home sales do slack off in the coming months, it is likely the index will either turn flat or begin to decline once again.<br />
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Components of the index that experienced negative growth over the past 12 months were New Residents (negative 12.6 percent growth), Container Traffic in Los Angeles (negative 7.1 percent growth) and Visitor Volume (negative 0.6 percent growth). While a small dip in visitor volume isn’t much to worry about, the much larger dip in residents moving to Clark County is, as a lack of new bodies could disrupt new home sales.<br />
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John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0tag:blogger.com,1999:blog-1485471530682345868.post-6404240384605719902013-04-24T14:51:00.002-07:002013-04-24T14:51:40.753-07:00Get It Together, VegasHave you ever known somebody who just couldn’t get it together, at least not permanently? They would get their stuff together for a few months, and then slide right back into their old back habits. If you work in Las Vegas commercial real estate, the answer is yes, and the friend is the real estate market.<br />
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2012 was a pretty good year for our CRE Recovery Index. There were a couple small dips in the index, but overall, things were looking up. The market did pretty well, as the index is supposed to predict, with office and retail putting up good, though not great, numbers, and industrial lagging behind until the first quarter of 2013, when it showed some surprising life. 2011 was a year of peaks and troughs, with things better at the end than the beginning, but 2012 was a pretty smooth ride in the right direction. And then 2013 showed up.<br />
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Just as the market posted its first all-around positive quarter in 5 years, with the industrial, office and retail markets all showing positive net absorption, the index was heading down. December 2012 saw the index fall from 91 to 88, inspired by lower visitor volume and gaming revenue and a less traffic through the port of Los Angeles. This wasn’t too worrisome, though, since tourism numbers can fluctuate and port traffic is, at best, a minor piece of the puzzle for Southern Nevada. January remained at 88; port traffic dropped again, but so did the number of new residents moving into the Valley, new home sales and, once again, visitor volume. These were balanced, though, by higher gaming revenue and taxable sales. February saw another dip in the index, down to 86, where the index stood in January 2012. New home sales were down again, as was gaming revenue, visitor volume, new residents and taxable sales. Is it time to worry?<br />
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If the index is accurate, it predicts a slow second quarter for commercial real estate, and perhaps a slow third quarter as well. That doesn’t necessarily means negative net absorption, but just less positive net absorption than we would like. While the office market has had three quarters of positive net absorption, the numbers have been on the decline. Retail has also been positive but weak. Industrial has the benefit of strong build-to-suit activity now, and will probably do well through mid-year. But, in general, the way ahead for commercial real estate could be a little rocky for the next few months.<br />
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<br />John Matthew Staterhttp://www.blogger.com/profile/02310914386482078369noreply@blogger.com0