Say what you will about the real estate market – good, bad or ugly – but it never fails to be interesting or exciting here in the Valley of the Sun. Look in the right places, and you’ll find opportunity. As investors continued to search for yield in 2013’s low-interest-rate environment, real estate investments remained in vogue and continued to provide attractive returns. Capital markets activity – both from an equity and debt perspective – has been robust and has shown clear signs investors and lenders have faith that the economic recovery, at least in the real estate sector, is sustainable.
According to the Greater Blue Chip Panel, the Phoenix metro commercial real estate market continues to improve, with demand for office space increasing near major business hubs. Population growth has fueled housing growth, in turn leading to increased retail sector activity. Increased job growth, strong leasing activity and constrained completions in all commercial sectors have given way to improving vacancy rates. Bottom line, the economy continues to show signs of slow and steady
improvement, which will be even more evident into 2015.Office vacancy rates closed out 2013 at a consensus of 21.4%, a 250-basis-point improvement from 2012. Vacancies in 2014 are expected to dip below 20%, which is a marked improvement from the 25.5% experienced in 2011. By the end of 2015, vacancy rates are anticipated to plummet to 18.5%, which is nonetheless still above the 15% associated with a healthy office market. The Greater Blue Chip Panel believes that new construction will be very modest in 2014 and 2015 while absorptions continue to increase.
The Phoenix metro area experienced an uptick in overall new completions in 2013 at 4.2 million, which contributed to the increase in vacancy. Speculative construction is expected to be considerably lower in 2014 and 2015, however, than 2013, with a larger focus on build-to-suit properties.Retail property construction is recovering nicely and is on pace to continue its upward trajectory over the next two years. New household formations encourage retailers to expand throughout the Valley. The Greater Phoenix Blue Chip Panel reports 2.5 million square feet absorbed in 2013 and 2.7 million square feet absorbed in 2014 and 2015. Accordingly, vacancy rates will dip below 10% in 2014 and below 9% in 2015. Property fundamentals improved across all asset classes throughout 2013, according to Integra Realty Resources, and capitalization rates continued to compress nationally, approaching or exceeding lows previously seen in 2006-07.
Trends in Residential
Now let’s take a look at the residential side of the real estate coin. From January 2014 to February 2014, the Phoenix metro area continued its slow shift into a buyer’s market due to an increase in supply and competition for sellers, while demand has remained stable. Our market entered a near-balance state at the end of October 2013, which generally would project stabilization within the next month. If our buyer’s market continues, we may see sale prices begin to decline by the end of spring.
The source of the data, Cromford Market Index, measures the relationship between supply and demand over time, and indicates shifts between seller’s and buyer’s markets. A measurement of 90-110 indicates equal advantage for both buyer and seller, over 110 indicates seller advantage and below 90 indicates buyer advantage. Current market conditions indicate that momentum is still shifting toward a buyer’s advantage, albeit slowly, continuing a trend that began in October. On a national basis, the 2014 National Association of Realtors Home Buyer and Seller Generational Trends study indicates that young home buyers remain optimistic and see their homes as good investments, while older buyers are more likely to trade down to smaller properties to match changing lifestyles. Lawrence Yun, NAR chief economist, said the Millennial generation, which is under the age of 34, is now entering the peak period in which people typically buy a first home. “Given that Millennials are the largest generation in history after the Baby Boomers, it means there is a potential for strong underlying demand. Moreover, their aspiration and the long- term investment aspect to owning a home remain solid among young people,” he said. “However, the challenges of tight credit, limited inventory, eroding affordability and high debt loads have limited the capacity of young people to own.”
Other interesting data points from the study:
14% of all home purchases were by multigenerational households, consisting of adult siblings, adult children, parents and/or grandparents.
22% of older Boomers (59 to 67 years old) and 18% of the Silent Generation (68 to 88 years old) purchased a home for a multigenerational household. The biggest reasons were adult children moving back home and cost savings, with each cited by 24 percent of all multigenerational households. Those were followed by health or caretaking of aging parents, 20%, and spending more time with aging parents, 11%.
26% of younger Boomers (49 to 58 years old) own more than one home, including investment properties and vacation homes.
24% of the Silent Generation was more likely to buy in a small town. The majority wanted to be closer to family and friends. 26% were also more likely to purchase in senior-related housing.
We’re seeing lenders starting to loosen up and approve buyers with less-than-perfect credit scores, which could boost demand, especially among the Millennials and Generation X. In the wake of excessively risky loans that contributed to the real estate crash in 2008, lenders had swung to the far side of the conservative spectrum from 2008-13; today, they can afford to take on some added risk as the economy gradually improves. Of course, that additional risk may come with higher interest rates attached. While higher rates are negative in many respects, the silver lining is that this could actually boost demand and improve sales if more people are approved for loans.
The Big Economic Picture
Real gross domestic product – the output of goods and services produced by labor and property located in the United states – increased at an annual rate of 2.4 percent from the third to the fourth quarter of 2013 according to the Bureau of Economic Analysis. The 16-day partial shutdown of federal agencies in October and weaker government spending weighed heavily on consumer spending. Business investment, however, showed improvement. spending on new equipment rose at the fastest pace since third-quarter 2011. Purchases of intellectual property, including computer software, showed the greatest increase since 2008. Consumer confidence in Arizona is reporting slow but steady gains. According to the Rocky Mountain Poll, “Consumers in Arizona remain about as optimistic toward the economy as at any time in the recent past.” since 2012, consumer confidence, derived from attitudes about business conditions, the job market and family income, has remained at a low level, especially when compared to the height of the economy, seen in 2007. Optimism in the economy is poised to improve somewhat in the next six months. How that impacts the commercial and residential real estate sectors remains to be seen.
Beth Jo Zeitzer, Esq., is the owner and designated broker of R.O.I Properties, a full-service real estate brokerage firm focused on working with business owners, investors and property owners regarding the marketing and sale of commercial and residential properties, including retail, office, industrial, multifamily, hospitality and land assets. Beth Jo can be reached at 602-319-1326 or bjz@roiproperties.com.
