(Save the date: RealShare Apartments comes to the Westin Bonaventure, Los Angeles, October 24, RealShare Medical Office Buildings comes to the Four Seasons in Scottsdale, AZ, November 7 -8, and RealShare Industrial 2012 comes to The Bankers Club, Miami, December 5 – 6.)
CALABASAS, CA-With the Fed’s extended commitment to low interest rates and unemployment numbers lowering, the stage is set for economic recovery in the office and industrial sectors, so why aren’t we seeing stronger absorption and a more robust recovery? One of the main reasons is “a crisis of confidence keeping an otherwise organic process of healing and recovery muted ,” according to Hessam Nadji, managing director of research and advisory services for Marcus & Millichap, during a recent “Office and Industrial Market Review and 2013 Outlook Webcast” presented by the firm.
“Our foundation has gotten healthier, but what holds us back are macro concerns and uncertainty,” Nadji explained. Among those factors are the impending election, instability in the European markets and the imminent expiration of Bush-era tax cuts, which must be addressed, postponed or minimized.
Still, a gradual recovery is continuing, and hopefully moderate levels of job growth will continue into 2013, with more transmission of job numbers into absorption, Nadji said.
Webcast moderator Alan L. Pontius, managing director of M&M’s national office and industrial properties group, asked Nadji what lawmakers are doing regarding the tax-cut expiration. “Everyone recognizes the severity of the fiscal cliff—it’s well understood by both sides,” Nadji responded. “What will be done remains to be seen, but the tone is ‘we can’t let this be ignored.’ ”
The overall picture for the office market is one of very gradual improvement, according to Nadji. Weaker than expected absorption is largely due to excess office space that was put back on the market during the recession, but he expects the improvement to continue.
Industrial absorption is positive, with port activity helping to bring down industrial vacancy rates and lack of spec construction being key to ongoing development, he added.
To answer Pontius’s question about the positive information coming from the housing market, Nadji said that housing has been a major driver to the economy and should have accounted to 35% of the GDP, but in this cycle it accounts for only 15% of the GDP. “Housing has been absent—it’s no longer a drag, it’s beginning to recover and the Fed has an agenda, which is spurring an organic housing recovery based on an affordability pattern. We’re going to see the broader economy benefit as housing improves.”
William E. Hughes, managing director of M&M Capital Corp., said that from his perspective, other than a little interest-rate volatility, very little has changed in the financial marketplace. “Deals are being done, but the greater challenge is that underwriting is focused on a stable income stream. Lender confidence translates into a focus on the two sectors.” He added that the capital supply should remain healthy, but not for every asset.
When Nadji asked if the Federal stimulus will cause an inflation problem when the economy gets going, Hughes replied, “Inflation is not necessarily bad. The question is going to be, can the Fed control it? At what oint in time do they start slowing down the stimulus?”
Pontius said that the way we use office space is continuing to evolve. “Companies are getting by on less square footage, even though their headcount stays the same.” He added that medical office—the bright spot in the office sector—has an overall vacancy rate of 10%, with the top ten US markets all below that level.
In the industrial sector, Pontius said that there has been a clear pick-up in trading activity, with markets other than the major markets taking a larger piece of the investment pie over the past few years.
He also said that while some investors are beginning to explore value-add opportunities in tertiary markets, debt availability may curb that appetite, with lenders still being risk averse. Hughes added, “Bottom line: Lenders are expecting to be presented with a story that the marketplace supports what they’re trying to do. It’s not an easy answer.”