IREM / CCIM Economic Forecast Recap – 2012 by Nick Miner, CCIM

I attended the CCIM/IREM Economic Forecast here in Phoenix on Wednesday (January 18, 2012). Whenever I attend these events, I like to summarize my notes to help people know what others are saying besides my own opinions. The event was a little different format this year from previous years so let me summarize it based upon the event for you.

Keynote Speaker, Barry Broome from GPEC, kicked off the event. As always, Barry has a very charming way of describing what is going on and what they are trying to do to get more businesses to move to Phoenix. Some of the interesting takeaways from him:
-Phoenix is the 3rd youngest metro in the USA
-GPEC is actively working to create a new brand that clusters around the ASU Supercomputer
-Phoenix is set to do very well in digital tech, personalized medicine (due to BioTech companies locating here), aerospace & defense
-Venture Capital investments are tough in Phoenix because we don’t necessarily have the social platform needed but they are working to build an Eco System that could support more VC investments.

The Operations Panel
This panel was made of receivers, lenders, owners and property managers. Some of the key takeaways: -Landlords under distress will do what they can to keep tenants
-the first dollar lost is the best dollar lost for most banks
-Lenders are still struggling to get their arms around market vs actual lease rates
-22% of all apartments are still offering rental concessions-this is down from 70% in 2009
-Regarding tenant delinquencies-lockouts are still a landlords best option, however, most landlords are more willing to work with tenants today
-Landlords/Managers are trying to get something from tenants today before locking out
-Landlords/Managers are more flexible with retail tenants today
-Perfecting the landlord liens for auctioning of tenant property is more frequent today, however, the quality of the equipment leftover is not there
-How to handle HVAC units from tenants that don’t have cash to pay?
-Negative cash flow properties in receivership-most banks/lenders are good for making advances to take care of issues
-Loan restructuring-in bus to extend credit. Dependent on the loans getting repaid. When asset class is weakened, credit gets rerated (tdr-trouble debt restructure).
-Apartments-life is good again. Rents are starting to increase. Market rate rents need to be $1.50/sf to build. Right now it is at $1.14/sf in best areas. Rest of the market is $.80-1.05/sf
-Retail-more activity, there are still lots of concessions; strengthening of the market and more confident in leasing vacant space
-Office-larger assets coming and more maturity defaults again $150B of loans coming due in the next 3 years

The Transaction Panel
The comments below are going to be more relevant to Office Properties because the makeup of the panel was more structured towards this product segment.

-Office-2011 a little better than 2010
-Title companies are seeing growth of transactions by 25%
-Healthcare recovering
-Senior Housing has moved to hyper supply
-Bioscience is in expansion
-Seeing a recovery in CRE
-There will be a hiccup this year when it comes to loan maturity
-3/4 of a trillion dollars of unpaid loan balances coming due
-Having to prove that new construction on spec
-Big questions are who’s controlling the product-note pool buyers
-cost of capital from FDIC is zero
-Special Servicer now controlling REO assets. This so going to be a slow trickle.
-Strategy for Brokers is to split their business in to thirds-1/3 to special services, 1/3 to banks, & the last 1/3 to private clients
-Trophy vs trash mentality
-The great exchange-still hasn’t happened.
-Can’t generalize the market pricing
-Medical users becoming more intense than ever before.
-Hospitals are going back to institutional services
-Hard to mix medical & office together
-Underlying zoning could be issues for medical users in traditional offices
-Biggest barrier to entry for buyers today is access to capital.
-Buying trend is changing; there have been a lot of cash deals with a focus on intrinsic value
-Trophy deals, life company loans available.
-REITS were competitive on medical.
-what would you do differently-be more selective on who they work with by interviewing owners before taking something on assignments
-Receiverships will taper off in 2-3 years.
-Services are reorganizing to sell assets. If small, they will move quicker.
-Rents should stabilize in office & it will be 2014 until vacancy is under 20%
-Companies are going to start hiring today if running a skeleton crew
-Phoenix is affordable
-There will be an uptick in stress for Q1-Q3 but will clear out quickly

To summarize, in my opinion, Phoenix started a decline in late 2007. There are good signs of a leveling off and no one is expecting any huge change in value. 2012 is the year to look hard at good properties and finally jump in and buy.

If you want to further discuss any of my notes and the market, please give me a call!