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Why California Transplants Affect Commercial Property Vacancy and Value

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Why California Transplants Affect Commercial Property Vacancy and Value

Some 168 years ago, John Babsone Lane Soule was quoted as saying “Go west young man, go west,” inspiring generations from the East coast to migrate west and test the Pacific waters for a better life. But today, the migration has shifted and California businesses and residents are beginning to pay a heavy price. But for Arizonans, the silver lining keeps shining brighter. We are one of four states who are primary recipients of the Golden State’s loss. To better understand why California transplants affect commercial property vacancy and value within our borders, let’s begin with an overview of what led to today’s real estate circumstances.

The Shrinking Middle Class Can Breathe in Arizona

Between the tax rates and rising costs of housing in California, many people are not only rethinking their quality of life there but realizing that the sought after California lifestyle is long gone. While residents of the state to our west battle whether Northern is better than Southern in terms of overall living, for those of us outside their borders don’t see the benefits in either half of the state.

California has the highest income taxes in the country; yes, they exceed New York and New Jersey. In addition, with the changes in the U.S. tax codes, homeowners in high property tax states are not able to write off their exorbitant taxes, increasing their tax liability. Some would argue that for the people who can afford to live in California and purchase those high-dollar homes, they can certainly pay more of their fair share in taxes. But it isn’t that simple.

Business Can’t Survive Without a Local Workforce

Capitalism is great. Just ask any business owner who’s made it. Chances are, there are middle- and lower-income individuals churning the wheels of progress for them. One of the reasons behind the growing migration of California residents to Arizona, Nevada, Texas and Tennessee is the irrational ratios of income and cost of living. Most people cannot afford to stay there as personal debt rises without any relief in sight.

Finding a case in point isn’t difficult. Go to an income query site and search for a salaried position in California, perhaps San Francisco or Los Angeles. Jot the salary down. Now, do the search again and change the location for any metro Phoenix area city, or check out Las Vegas or Nashville. You’ll notice that the salary rates aren’t that different from what California employers are offering. In addition, California state income taxes are near double of what they are in Arizona, so workers’ take home pay is much less, comparatively speaking.

Add the salary component to the disparaging housing costs and California migration is a no-brainer. In fact, the median price for a home in California compared to Arizona is 60 percent higher. More than the cost to purchase a property, and the associated property taxes, increasing interest rates take a toll on affordability factors.

But if middle-income earners are effectively priced out of the housing market, then how can businesses meet their workforce demand? They can’t.

Cities near Los Angeles Close to Agriculture Hit Hard

The beautiful beaches in Ventura County California easily mask the ugliness of what’s happening to local businesses there. Their financial landscape has grown progressively bleak in recent years. For the reasons noted earlier in this article, the people of this laid-back region are experiencing a loss of vibrancy that was unexpected. The recent wildfires and SOAR haven’t helped either.

Ventura County is one of many areas in California that have adopted commercial and residential development restrictions in an effort to maintain preservation of its natural resources and open land, which some view as scarce.

SOAR, Save Open Space and Agricultural Resources, puts heavy restrictions on agricultural land development, something that Ventura County wants to open up to so that they can keep their residents and businesses from leaving and heading to Arizona. In fact some local experts say that the California housing shortage would require several million units to adequately meet demand.

Until that happens, the land of rugged beaches and environmental protectors may find itself teeming with the wealthy and vying for the attention of mainstream America.

California Might Be for the Few, But Arizona Is Happy Being Mainstream

Massive enterprises are finding refuge in Arizona. Companies such as Caterpillar, Raytheon, Amazon, and IAC Industries are either relocating here or expanding their presence, perhaps as a precautionary method, to the changing tide of California.

Although Arizona doesn’t have the ocean as a border, we do have easy access transportation arteries for manufacturing and industrial businesses. As businesses move more towards enhancing their digital footprint, the need for physical space has changed. What was once essential to retail, brick-and-mortar, a boutique real estate presence or smaller-scale headquarters means that these business owners can be pickier about where they hub their brand and the price they’re willing to pay to do it well.

Phoenix, Scottsdale, Tempe, Gilbert and Mesa also provide California transplants a vision of what once was prevalent in Los Angeles and the Bay Area, now gone: the freedom to grow at a price they can live with.

As Arizona continues to reap the rewards of this massive exodus from California, vacancy rates in commercial property could tighten, and new development will become evident. This will also spur an increased need for multi-family units, already stressed to meet demand. Together, the recent hiccup in property values should be short-lived as the migration will continue throughout 2019.

Lessons Learned from California Should Be Heeded in Phoenix and Surrounding Cities

Residential and commercial property owners who had to succumb to the perils of 2008 and the real estate crash can lay testament to the phrase, “What goes up…” you know the rest. Arizona is not, nor will it ever be, California. However, we can consider this take away: Enjoy what is today and plan for the unexpected tomorrow.

Know a California Transplant Looking to Invest in Commercial Real Estate? We Have Property

The Number One Reason Why Investors Need to Buy In Arizona Sooner than Later

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The Number One Reason Why Investors Need to Buy In Arizona Sooner than Later

Jack be nimble. Jack be quick. Will we need to tap dance around what’s coming in commercial real estate for 2019? It isn’t what you might think. This is hardly a story about pending doom and gloom for investors or novice buy-and-hold rental property owners. In fact, things are looking golden for the Phoenix area and the 2019 Arizona real estate forecast. While the overall tone across the country could leave you with a lackluster desire to plough ahead and bring dollars here, there or anywhere for that matter, let’s shed some light on why investors need to buy in Arizona sooner than later.

Deloitte Has Some Good News for Next Year

Each year, the worldwide financial service provider Deloitte bestows its industry-expert suppositions on what the recent past brings to the forecast of tomorrow. The statements bear a lot on how commercial real estate investing is subject to global economies, now perhaps more than ever. As we’ve already seen, predictability has gone out the window. While many long-standing investors and institutional investment firms continue to sing the praises of traditional models in asset allocation, today’s financial environment puts tradition to task.

How did this happen? Younger mindset. Versatility takes second place to flexibility. And business agility leads the pack. Here’s why.

Knowledge Will Remain the Engine of Power

Just keeping up with market perception, investment reality and the next big chess move in business is enough to make your head spin. And if you’re an investor in real estate, other markets still matter. But who has time to stay on top of everything that’s happening and changing on a dime? Not me, not you, and more than likely (though he’d never admit it) not even the President.

In short, the best way to head into 2019 to stay on top of investment strategies is to use global resources to acquire broad-based knowledge while aligning with local commercial real estate experts, such as COBE Real Estate, to fine tune property acquisition plans and map out the best time to sell.

According to a November 2018 Phoenix Business Journal article, next year will continue the Valley of the Sun’s ranking as a boomtown and that’s music to residential and commercial investors.

If you were reading real estate news as recently as October of this year, there were whispers of a slow down on the horizon, though it didn’t make much sense considering that vacancy rates remain low. But new numbers about Phoenix real estate and the state economy debunk the slow down and define a full-steam-ahead approach.

According to Trulia, more people are looking at moving to the Phoenix area than moving away from it. And with relocation to our borders comes more businesses looking to improve their success rate. Those businesses need property. Their employees need property. This is how the cycle of success runs well. Out of the U.S. 100 largest metro areas, Phoenix stands as number 7 on Trulia’s list of best places to experience growth.

Positioned Well for Growth in 2019

The growth analysis mentioned above was based on a variety of considerations to include affordability, percentage of population under 35 years old, vacancy rates, job growth and more. And while current property owners are praising recent year-over-year value increases, the momentum should continue, thanks to this year’s 2.9 percent job growth rate.

Homebuilders are buying up land and requesting permits to begin new developments. Areas of Chandler are seeing explosive growth due to a large influx from the technology sector near the Loop 202.

In short, our numbers still make sense and as long as there are areas in the country that put a damper on job growth and investment opportunities, Arizona will continue to reap the rewards in retail, land, industrial and more. Here’s a case in point.

California Business Owners Are Creating a Great Divide

It wouldn’t be a stretch to claim that California is in dire need of a middle ground between socioeconomic populations. Visual images of the poor living in squalor near the high rises and other beautiful architecture that made the bay area the foothold for economic success and prosperity is not only disturbing but defines imbalance.

Through the recent passing of Proposition C, the landscape quickly changed for the impoverished who live there and the business owners who operate above them. What is proving to be positive change for the people may not shake out so well for big tech in Northern California and it could drive relocation across our borders.

While Prop C is a collaborative initiative to help clean up the streets, provide shelter and other necessities for the homeless, it’s funding comes, in part, from local big business. And some are not happy about it because they aren’t getting the tax benefits that would make their investment in the proposition attractive.

There is talk of moving big business technology headquarters to other markets, especially the Southwest, where the cost of owning property and doing business is much more attractive. This is just one instance that supports our continued growth and why investors should buy in Arizona, sooner than later.

About that number 1 reason to buy in Arizona, now…

Leap but Don’t Jump into Arizona Investments

Bucking tradition in business seems to be the norm, as economic predictors, forecasts and reality hop around with inconsequential sequence like the lights on a video game. How do you make a straight-line decision on commercial real estate when the environment is changing faster than the speed of light (so it seems)?

Leap but don’t jump. They aren’t the same. Leap into opportunity with full force, looking forward and confident with the industry knowledge needed to land on solid ground. Without it, you’re jumping in on a hope and a prayer. There’s something to be said about a common sense approach.

Timing is everything. Timing isn’t just about the right market conditions, the right property at the right price. Timing has to do with your personal portfolio, investment goals and how they define what’s best for you in the short- and long-term.

Discover How Common Sense and Market Agility Move Well Together

Single Biggest Myth about the 2018 Phoenix Commercial Real Estate Market

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Biggest Myth about the 2018 Phoenix Commercial Real Estate Market

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.

Secure Your Commercial Real Estate Plan for the New Year