If you owned commercial property from 2007 to 2013 in the Phoenix metro area and managed to hang on to it through that ugly rough patch, congratulations! During that time and up to now, you’ve probably asked your agent or broker to provide current market analysis and property value updates, monthly. (smile) We get that. But at the moment, the market is better. While the negative impressions from the past remain dormant in our minds, it wouldn’t take much to embed a resurgence of fear about the future. Not only have we rebounded but 2017 and 2018 were solid years of vacancy absorption, increased rental rates and new construction. Before we can formulate buying and selling strategies for 2019, we thought it would be advantageous to look back on this year and identify the biggest myth about 2018 Phoenix commercial real estate.
Is the Other Shoe Going to Drop?
If there was an investment out there that had a guarantee of equity gain without any period of loss, we’d all buy into it — and good luck getting a piece as commercial brokers would probably take it all for themselves! All joking aside, no risk no reward heavily applies in real estate. It’s the nature of the beast and those who can ride out the down swings will fare better, emotionally and financially. Although there is no crystal ball that can foretell when the right time to buy, sell or hold will be, investors have grown to rely on expert forecasts and predictable shifts in Phoenix real estate cycles.
But the U.S. 2008 economic disaster and subsequent plunge in our local market values went beyond the expected and unexpected. So how do you prepare, much less predict, when the next commercial real estate shoe will drop?
We watch the news feeds on social media. We talk to our industry peers here in Phoenix and in other parts of the country. We attend symposiums, lectures and conventions hosted by economic powerhouses and predictors of what’s to come. Here’s what they’re saying about 2018 and what’s in front of us.
How National Trends Affect the Phoenix Commercial Market
Taking the time to look at human behavior across multiple generations helps property owners weigh in on what to expect in the short-term and make adjustments to their portfolio. The key is to focus on real estate around specific niches, such as baby boomers, Generation X, millennials and the up-and-coming Generation Z. Each has its own set of preferences in how to conduct business, where to live and what quality of life means. Understanding what a positive work/life balance means to each will help identify recommended next steps in real estate acquisitions and missing holes of opportunity yet to be filled.
Much as we’d like to leave politics outside the spectrum of investment decision-making, current municipal, state and national leaders do have a heavy hand in what happens on financial scales. It’s a strange mix of factual data and fear that can set a spin on where we stand today and tomorrow, though another spin and set of circumstances can seemingly change it all overnight.
More details on the status of real estate are found in a study entitled Emerging Trends in Real Estate, published collectively by the Urban Land Institute and PwC each year on where we are, why we’re there and what to expect.
Interestingly enough, from tax and growth perspectives, Phoenix metro and surrounding areas are poised to withstand a temporary hiccup well, more than many other regions in the U.S. These are just some of the reasons why many people are bringing their businesses to our state.
Five Facts that Support Continued Growth
Before we lay out what the biggest myth is for Phoenix commercial real estate over the past year, the following shows what some of our biggest strengths are, heading in to 2019.
5 Leading Indicators of 2019
- Surge in urban living across multiple generations
- Desirability in industrial (location and multiple use)
- National and international interest in Phoenix
- Tech-savvy design leads office and multi-family space
- Generation Z brings resurgence to brick-and-mortar retail
As mentioned earlier in this article, planning for real estate ownership, property management and marketability in leasing and sales success will rely on the ability to align with the list of trends noted above.
When Leverage Is High, the Risks Are Higher
One of the best ways to increase the odds in your favor and protect against market fluctuation is to leverage investments within reason. This might sound too conservative but you’ll never be able to capitalize on an opportunity that arises unexpectedly with debt out of reach and cash resources depleted.
Revisit net operating expenses every six months and ask your broker or property manager for creative ways to cut costs without compromising integrity and value. If you use loans to build projects or acquire property, make sure to keep knowledgeable on new programs based on asset allocation perhaps, that could shore up additional resources to tap in to.
Here’s the drum roll…
A Word on Predictable Volatility
What is predictable volatility? Anyone that held their hat on predicting Phoenix real estate cycles probably ate a lot of crow in 2008. Predictable went out the window then and could serve as a lesson for the future in how to prepare for the next market adjustment.
The only constant is change. So how can you stabilize change? Soften the blow. Volatility happens. But it’s made worse by investors who overleverage and look at numbers the way they want to see them instead of what they truly represent. In addition, as if the past hasn’t taught us already, expect the unexpected and sell before it peaks or make adjustments to ride out the cycle so that that your portfolio can take a hit or two.
Buy Local but Think Global
Real estate in Arizona is different than it was just a decade ago. As we need to keep a pulse on what’s going on at the local level, having a broad-based understanding of North America and outside our borders affects commercial real estate attractiveness for small and large scale investors because we truly are a global marketplace.
Soft Landings We Can Live With
This gravy train in real estate won’t last forever. Some experts believe that when the correction comes, it will be palatable. According to Forbes magazine, Phoenix ranks number 5 for top 10 booming real estate markets with more room to grow.
Where will you be in 2019? It depends on whether you accept the myth or learn how to dance with the market.