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.

Moving Targets

Think 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.

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.

Hoover Dam, photo by Ansel Adams

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.

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.

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.

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.

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.

Income and Expenses

You 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.

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.

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.

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.

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.

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.

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.

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’).

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.

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?

Inside the Box

Cat in a box Calicocindy/ Public domain

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.

“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.

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.

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.

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.

Groping in the Dark

For the last couple weeks, I’ve been reading a book called The Horse, The Wheel and Language 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.

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.

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.

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.

If you visit the Bureau of Economic Analysis 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 Bureau of Labor Statistics 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.

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.

JMS

Retail and Culture

Once 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.

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.

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.

So what’s the point?

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.

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.

JMS

Almost There

When 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.

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.
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.

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.

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.

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.

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.