It has been my experience that if you try to get an accurate read on the economy from the media you will be left dazed and confused. One minute a reporter on CNBC is reporting on terrific economic data and then another starts talking about a recession. It seems as though they deal more in opinions than facts. As a real estate investor and advisor, it is critical to my success to know what is happening in the areas where I invest and the economic landscape of the local economy. It is also just as critical to understand the national economy and how what happens across the US and the World will impact the success of my investments. Understanding the local economy and Charleston commercial real estate market can be simple as long as you are diligent in your research and ask all the right questions. However, trying to get a read on the national and global economy is more challenging because you are limited to research done by others or god forbid relying on the media. So in order to get the most accurate understanding of the US economy I decided to travel to several cities across the Country to do some ‘boots on the ground’ research to get the best view of reality.
Obviously the United States is a vast amount of territory to cover so in order get the most out of my research I have devised a methodology of study that segmented the Country into three segments; the West which covers from Albuquerque NM to Napa Valley, Southcentral which covers from Amarillo Texas to Little Rock Arkansas and the East which covers from Birmingham Alabama to Charleston SC.
I begin my research in the Southcentral region in the ducking hunting capital of the world, Little Rock Arkansas. Little Rock was resilient during and throughout the recession. This was due in large part to three factors: the metro area was less exposed to the housing crisis, a substantial portion of employees work for state and local governments and the health and education services sector continued to grow along a prerecession trend. In the retail sector, Little Rock is the corporate headquarters for Dillard’s Department Stores. Despite the negative news surrounding the retail industry, Dillard’s Inc. CEO William Dillard II said he is encouraged with some recent trends. However, Dillard admitted at a recent board meeting that mall-based retailers are struggling. A recent report noted that 4,000 stores in malls have closed across the country so far this year. Dillard’s operates 293 stores in 29 states, most of them in malls. For the most part, the economic indicators are strong for central Arkansas. They are experiencing a vibrant and healthy commercial real estate market right now that will bear fruit for some time to come. However per a local commercial real estate broker, sustaining that momentum will be the challenge the community faces in the coming years. It can be best summed up in two words; “Cautious Optimism”.
Next I move on to Oklahoma City where total job growth was relatively flat in 2016. However, this was viewed by many as a positive given the downturn in the oil and gas sector. Historically, the region and state have performed much worse in times of declining oil prices. Increased diversification within the Greater Oklahoma City regional economy has attributed to the avoidance of overall job declines. One specific example that highlights how soft job growth has been for Oklahoma City is the comparison of the average monthly not Seasonally Adjusted Nonfarm Employment for the first half of the year against the second half of the year. The average monthly Nonfarm employment for the second half of the year is almost always larger than the first half. Yet in 2016, for only the second time in the last 26 years, Oklahoma City’s average monthly Nonfarm employment for the last half of the year was lower than the first half. Oklahoma City is expected to continue this dampening of job growth in 2017. The Oklahoma City Office market was historically bad in 2016, experiencing negative absorption of nearly 521,000 square feet. The second worst year for absorption was 2002 when the market had negative absorption of 299,000 square feet. Overall, the vacancy rate increased from 12.3% to 15.5%. Moving forward, it is not anticipated that 2017 will be anywhere near as bad a year for the market, but there are still significant challenges ahead as more space is expected to hit the market from the prolonged energy industry downturn. Many energy companies still occupy more space than they need. Some are holding onto to the space in anticipation of a rebound in the market. However, many of the companies have right-sized their employee numbers and improved operating efficiencies so it is expected some of that excess space to eventually find its way back on the market.
In Amarillo Texas, the recovery over the last eight years has been somewhat tepid. The City saw improvements in 2016, however most of the job gains were in hospitality and service. Once again, the weak energy sector hurt those jobs at year end. One of 2016’s bright spots was real estate. The Amarillo National Bank report tallied a 21 percent increase in housing starts due to lower mortgage rates and job growth. However, the 2017 forecast calls for a slowdown in that industry, but not a collapse. Without major job growth and new industry coming to the area, housing starts can’t be used as a leading indicator. For 2017 housing starts have been lower and commercial construction has been flat which means that other industries will have to carry job gains. If the oil and natural gas prices show improvement in 2017, the strongest job gains is expected to be in that sector. There has been a bright spot in commercial activity, with a significant amount of activity downtown, along with the giant Pantex project. The Pantex Renewable Energy Project, known as PREP, will use the energy stored in Texas Panhandle winds to help power one of the key facilities in the National Nuclear Security Administration’s weapons complex. Once completed it will be the largest federally owned wind farm in the country. Amarillo is expected to continue to gradually strengthen in 2017 and have a better year. However that is against the backdrop of a very flat economy over the last couple of years. Moving forward, oil industry analyst from Amarillo believe the combination of less regulation, a less burdensome Environmental Protection Agency and a lowering of corporate and individual tax rates will have a positive effect on much more than the business environment. It gives companies and households greater optimism about business conditions which in turn frees up their thinking about expanding business and hiring people.
In summary, in the Southcentral region the recovery from the Great Recession has been slow and arduous. The collapse of the energy sector has further exacerbated the challenges these communities face. One theory that I will further explore is how much of the positive economic growth that other communities in the East have experience is being driven by the lack of growth in other parts of the Country. Most importantly is that growth sustainable. As I have written in other blog postings the key to successful real estate investing is sustainability. Moving forward the Southcentral region is expected to continue the slow movement towards full recovery. The big question that remains is, like the tortoise and the hare, will slow and steady win the race?
Watch for Part 2 in this Blog series in the coming weeks where I will explore the West region of the Country.
Our investment team does ongoing market research and site analysis to determine the best locations geared towards our investment strategy.
We perform site inspections and consult with general contractors and architects to identify property improvement opportunities and cost estimates.
We do extensive property analysis including underwriting property historical cash flow, three tiered income modeling, future cash flow projections and IRR and cash on cash return profitability models.
Our team underwrites the current tenants and reviews all current lease agreements to determine an appropriate credit grade of the property and identify opportunities for improvement.
