Recovery and Transition

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.

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.

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.

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.

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.

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.

Into the Weeds with Employment

For 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.

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.

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.

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.

The above table shows the change in estimated industrial employment between the old method of calculation versus the new method of calculation.

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.

Industrial Looks to 2013 (‘Cause 2012 Is Better Forgotten)

Excerpts from the Colliers International Q4 Las Vegas Industrial Report ...

While the office and retail markets in Southern Nevada continue to improve, the industrial market appears to be the wallflower of commercial real estate. The culprit is most likely the construction sector, for other sectors of industrial employment are showing year-over-year job gains. After a positive year of net absorption in 2011, the industrial market gave back 268,000 square feet of occupied space in 2012. The vacancy rate increased to a new high of 15 percent, and asking rental rates dropped, year-over-year, by $0.03, to $0.48 per square foot (psf) on a triple-net (NNN) basis. For the industrial market, recovery remains elusive.

By any measure, 2012 was a disappointment, though not necessarily a surprising disappointment. The surge in industrial activity experienced in the middle of 2011 raised hopes, but the slow down experienced in late 2011 tempered expectations for the new year, and most people understood that there were head winds to overcome. Industrial employment growth was weak in 2012, and demand for industrial space generally followed suit. As people once again begin moving into Southern Nevada and the available housing inventory is slowly drawn down, the construction sector should find its bottom and then begin to grow. This could still be a two to three year process, but unraveling the problems created during the housing bubble is a tricky thing that cannot be rushed. Several build-to-suit industrial projects are slated to be completed in 2013, and this should help improve the numbers, at least temporarily, but it seems increasingly unlikely that Southern Nevada’s industrial market will really recover until the construction sector finally stabilizes and then begins to grow again. We think 2013 holds the possibility of slow growth, but it is more likely that 2013 will be another difficult year for the industrial market, with as many negatives as positives.

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