Categories Economy, Narrative

Rules for Capital

When writing my LIFEies (my weekly blog on personal development) I get to share very complex ideas that are made simple by lots of people. Like Albert Einstein said, “The definition of genius is taking the complex and making it simple.”

For this narrative, however, I focus on more complex Commercial Real Estate developments. But every now and then someone like Brian Watson (below) catches my eye with ideas that are pretty profound and simple. 
 
Brian wrote four simple rules for capital:
 
Capital will flow to:
1– Where it’s most wanted
2– Where it’s respected
3– Where it’s safe
4– Where it has the highest probability of market-rate adjusted returns.
 
This is exactly what we do with our tenant advisory clients; turn a complex, highly stressful renewal or relocation into our proven unique process (for more info, check out our website: http://www.c2advisors.com/our-service.html).   Call us if you have a need, or just want to start a relationship.

As always, thank you for reading my narrative.

 

Craig

602.954.3762
ccoppola@leearizona.com


 

 

Smaller American cities are attracting investment capital from overseas
Brian Watson
9/12/17 

There are four simple rules about capital investment, especially in commercial real estate: It will flow to where it’s most wanted, where it’s respected, where it’s safe, and where it has the highest probability of market-rate adjusted returns.

And that’s exactly what’s driving international capital into commercial real estate right now in the U.S., in ways that will impact everything from rents to the eventual shape of our skylines.

Global investors, concerned by a cooling Chinese economy and ongoing concerns related to Brexit and the future of the European Union, are increasingly turning their attention to the U.S. for safety, cash-flow, higher returns and stability, bringing much of the investment capital that used to flow into Europe and China with them.

Some investment is even coming in from Venezuela, which is mired in strife and turmoil, and many other South American countries.

The result?

The big gateway city markets in this country—New York, L.A., and Miami, for example —where international investors tend to focus their attention, may be overheated. Prices in those cities, particularly in real estate, are reaching all-time highs, reducing the potential upside and pricing out even deep-pocketed investors.

As a result, major metros like New York may be in the 9th inning for investors — everyone is getting in their last at-bats. But the music could be over soon. All markets eventually cool off or plateau, as what goes up, comes down eventually.

Yet, there is another side to this trend that’s worth noting.

Given the overheated gateway markets, international capital is now seeking purchase in second-  and third-tier American cities —places like Denver, Phoenix and Nashville​.  In communities like these, the economic impact from energy (think fracking) and manufacturing (think self-driving cars) are likely to mean rising incomes and values. 

Some of these cities are just plain hot. The cost of doing business ​in Nashville, for example, is 20% less than the rest of the country. Others are experiencing population and job growth where investors are finding greater value and greater potential returns.

Salt Lake City, for instance, posted some of the fastest job growth in the nation last year at 3.4 percent and payrolls were at an all-time high. ​ And in Raleigh, N.C., highly paid millennials now account for more than 23 percent of the city’s population.  They need places to spend that income and their spending will help other local businesses as well.

On the one hand, this is great news for the U.S. as more capital is infused into local markets, which creates construction jobs, provides new space for companies, and frees up capital for sellers of existing assets to deploy into other investment opportunities.

But the impact on prices in the tertiary markets remains a question. Excess capital has been inflating real estate prices in gateway cities for a variety of reasons, including foreign investors viewing them as more stable when held up against other, riskier overseas markets. This risk can take the form of both economic and political.

Over time, this trend may begin happening in places such as Oakland and Tulsa as overseas investors pile in, creating opportunity for the average American seller, and more competition for local buyers seeking to buy property in their own city. The potential is there to begin pricing out domestic buyers in mid-sized cities, much as they have been priced out of many major markets.

But one thing is clear: international interest in the U.S. is not going away.

In fact, the potential changes that are coming to domestic regulations, infrastructure spending, energy development and more all point to a U.S. market that will continue to be very attractive for overseas capital for the foreseeable future.

Brian Watson is Chairman and Chief Executive Officer of  Northstar Commercial Partners

 

Categories Economy, Narrative, Office Market

The Highest Taxed Buildings in America

In many ways, I am jaded after being in the CRE brokerage business for so long.  Representing office tenants means you get to see just about everything. But I also live in an Arizona bubble most of the time. So I was SHOCKED at the amount of property taxes that the highest-taxed buildings in America pay.  

Consider this:

  • 82 of the buildings are in New York.
  • 74 are office buildings including the #1 highest taxed building.
  • The oldest building is 111 years old.
  • Median age of the buildings are 54 years old.
  • Average taxes paid: $24,444,281 A YEAR!

 
Grand Canyon University campus is the highest taxed property (the whole campus) in Arizona at $6.5 million.  A steal compared to the $71 million the GM Building pays in NYC.
 
My takeaway:  It’s good to be in Arizona

 

Craig

602.954.3762
ccoppola@leearizona.com


 

The Highest Taxed Buildings in America

Iona Neamt


May 24th, 2017 

The fact that Manhattan dominates the rankings doesn’t come as a shock, but the difference in numbers might. The list compiled by COMMERCIALCafé is quite the mixed bag.
 
Property owners in the U.S. shell out substantial–sometimes huge–amounts of cash on property taxes every year, and those taxes only increase as a building changes hands at a higher price and becomes more appealing to investors. The fact that the top taxpaying buildings in the U.S. are located in Manhattan won’t necessarily come as a shock, either, but the difference in numbers might. The New York City commercial real estate market remains the destination of choice for national and offshore investors alike, and some of the largest corporations in the world are based there. So it makes sense that Big Apple property owners would pay sky-high amounts in taxes–but the numbers are much higher than you think. Take the General Motors Building, for instance: Boston Properties spends more than $71 million on taxes alone for its Fifth Avenue office building. That’s an excessively high price in itself, but when you compare it with property taxes paid elsewhere in the U.S., that number seems downright outrageous. However, there are a few properties outside of New York that also fork over big wads of cash on taxes every year. Some you’ll recognize, and some might surprise you, but they all earned a spot on COMMERCIALCafé’s list of the top 100 taxpaying properties in the U.S. Check it out below:

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Categories Economy, Narrative

Meet Your New Landlord At Home

I have a great friend, Trish, who has been a mentor to me for the past 30 years.  She is in the residential ownership and management business, and has been a great insight into the changes happening in that sector. Which is why I’m not surprised by the below article, and the size of the companies now involved in buying homes.

Last year the residential landscape started changing. Drastically. Here are some key thoughts from the Wall Street Journal article below:

  • Institutional investors have entered the residential housing market for the first time since the recession.
  • Big sums of investor money flooding the market has created competitive buying conditions for both families and investors.
  • Families that are not able to pay elevated prices in inflated areas are obligated to pay higher rental rates.
  • Investors are not only building equity, they are exceeding their monthly mortgage obligations in rental income.

When $40 billion and 200,000 homes are bought by investors (not users), and the buyers are Wall Street notables like Colony Starwood—Blackstone, Goldman Sachs, etc., it’s a sure sign the market is changing.  While this is only 2 percent of the overall market, that is enough to move the market—increasing prices now when there is more demand than supply and holding prices down when these giants decide to sell (and they will).

Keep your eyes on this trend, and call me if you want to discuss.

 

Craig

602.954.3762
ccoppola@leearizona.com


 

Meet Your New Landlord: Wall Street

By: Ryan Dezember & Laura Kusisto

July 21, 2017







Company Town

Big investment firms began buying single-family homes in Spring Hill, Tenn., in 2012 and offering them for rent. Four firms now own about 5% of the houses in town.

SPRING HILL, Tenn.—When real-estate agent Don Nugent listed a three-bedroom, two-bath house here on Jo Ann Drive, offers came immediately, including a $208,000 one from a couple with a young child looking for their first home.

A competing bid was too attractive to pass up. American Homes 4 Rent AMH 0.14% a public company that had been scooping up homes in the neighborhood, offered the same amount—but all cash, no inspection required.

Twelve hours after the house went on the market in April, the Agoura Hills, Calif.-based real-estate investment trust signed a contract. About a month later, it put the house back on the market, this time for rent, for $1,575 a month.

A new breed of homeowners has arrived in this middle-class suburb of Nashville and in many other communities around the country: big investment firms in the business of offering single-family homes for rent. Their appearance has shaken up sales and rental markets and, in some neighborhoods, sparked rent increases.

On Jo Ann Drive alone, American Homes 4 Rent owns seven homes, property records indicate. In all of Spring Hill, four firms—American Homes, Colony Starwood Homes , SFR 5.15% Progress Residential and Streetlane Homes—own nearly 700 houses, according to tax rolls. That amounts to about 5% of all the houses in town, a 2016 census indicates, and roughly three-quarters of those available for rent, according to Lisa Wurth, president of the local Realtors’ association.

Those four companies and others like them have become big landlords in other Nashville suburbs, and in neighborhoods outside Atlanta, Phoenix and a couple dozen other metropolitan areas. All told, big investors have spent some $40 billion buying about 200,000 houses, renovating them and building rental-management businesses, estimates real-estate research firm Green Street Advisors LLC. Still, they own less than 2% of all U.S. rental homes, according to Green Street.

The buying spree amounts to a huge bet that the homeownership rate, which currently is hovering around a five-decade low, will stay low and that rents will continue to rise. The investors also are wagering that many people no longer see owning a home as an essential part of the American dream.

“The rental stigma has really subsided,” says Michael Cook, operations chief at closely held Streetlane Homes, which owns about 4,000 houses. “People are realizing that houses are not necessarily the best places to store wealth.”

Corporate homeowners in Spring Hill have turned many single-family homes into rentals.

For many years, the rental-home business was dominated by small businesses and mom-and-pop investors, most of whom owned just a property or two. Big investment firms concentrated on other real-estate sectors—apartment buildings, office towers, shopping centers and warehouses—reasoning that single-family homes were too difficult to acquire en masse and unwieldy to manage and maintain.

That all began to change during the financial crisis a decade ago. Swaths of suburbia were sold on courthouse steps after millions of Americans defaulted on mortgages.Veteran real-estate investors raced to buy tens of thousands of deeply discounted houses, often sight unseen. The big buyers included investors Thomas Barrack Jr. and Barry Sternlicht —who later merged their rental-home holdings to create Colony Starwood— Blackstone Group LP, the world’s largest private-equity firm, and self-storage magnate B. Wayne Hughes, who is behind American Homes.

On the first Tuesday of each month during the crisis, investors sent bidders to foreclosure auctions around Atlanta, where the foreclosure rate exceeded 3% in 2011, according to real-estate analytics firm CoreLogic Inc. They toted duffels stuffed with millions of dollars in cashier’s checks made out in various denominations so they wouldn’t have to interrupt their buying sprees with trips to the bank, according to people who participated in the auctions.

Similar scenes played out in Phoenix, where the foreclosure rate hit 5% in late 2010, and in Las Vegas, where it nearly reached 10%.

The big investors accumulated tens of thousands of houses around those cities and others, including Dallas, Chicago and all over Florida, then got to work sprucing them up to rent. Often, renovations were major. Invitation HomesInc., the company Blackstone created to manage its rental homes and took public in January, says it spent an average of $25,000 fixing up each of the foreclosed homes it bought.
 
A young resident of Spring Hill played ball last month on Cynthia Lane, a street with multiple rental properties.

The bulk-buying brought blighted properties back to life and helped speed the recovery of some of the regions hardest hit by the housing crisis. Executives at the investment firms say they offer homes in good school districts to families that may not be able to buy in those neighborhoods because of damaged credit and tighter postcrisis lending standards.

One of those firms, Progress Residential, is owned by a private-equity firm formed by Donald Mullen Jr., a former Goldman Sachs Group Inc. mortgage chief who oversaw the bank’s lucrative bet against the housing market a decade ago. Progress now owns about 20,000 houses.

On a call with investors earlier this year, Mr. Mullen said Progress was betting that much of the middle class will have to rent if it wants to maintain the suburban lifestyle of the past. He said Progress offers “aspirational living experience” to tenants he described as typically about 38 years old and married, with a child or two, annual income of about $88,000, less-than-stellar FICO credit scores of 665 and $45,000 of debt. “Our residents are quite a ways away from being able to purchase a home,” he said.

Home prices in many markets are nearing their 2006 peaks, prompting some investors who bought homes during the downturn to flip them at a profit. But the big buy-to-rent investors are hanging on to their properties and looking to grow.

With fewer foreclosure properties available to buy, those firms have devised other ways to accumulate homes, including buying out rivals, building homes themselves, and buying properties one-by-one on the open market. They are focusing on places where they have gained scale through early foreclosure purchases, or around booming cities such as Nashville, Denver and Seattle.

Corporate buyers prefer easy-to-maintain newer homes in entry-level price ranges and in neighborhoods governed by homeowners associations. 

With family renters in mind, they rarely consider anything smaller than a three-bedroom. They prefer easy-to-maintain newer homes in entry-level price ranges and in neighborhoods governed by homeowners associations, which can help look after their properties. They often outfit their homes with the same appliances, fixtures and flooring so that their maintenance crews have parts on hand when they make house calls.

They have deep pockets and are dispassionate buyers, paying with cash and never fussing over the carpet or paint color.

Spring Hill is about an hour’s drive south of downtown Nashville. It has attracted investors for the same reasons families flock there. It boasts top-rated schools and has been adding jobs at one of the fastest clips in the country. General Motors Co. kick-started the town’s growth in 1990 when it opened a vast plant for its now-defunct Saturn brand. The population has grown from about 1,500 back then to some 36,000 today, with subdivisions covering what had once been farmland.

American Homes arrived in 2012, the year after it was founded by Mr. Hughes, now 83 years old, who made billions in the self-storage business, and David Singelyn, who is the company’s chief executive. Mr. Hughes told one of his earliest investors, Alaska’s state oil fund, that he imagined the sort of tenants he wanted—families with school-age children—and then went looking for suitable houses in good school districts.

Nashville’s foreclosure rate never exceeded 2%, so American Homes approached a local builder, John Maher, who had been renting unsold homes in his subdivisions. The company bought about 50 homes from him and later paid about $10 million for 42 rental homes in the area from local landlord Bruce McNeilage and his partners. Then it enlisted local brokers to find more.

Bruce McNeilage and his partners sold 42 rental homes around Nashville to American Homes 4 Rent.

Colony Starwood and Progress followed. The proliferation of rental homes spooked owners in some neighborhoods. A few subdivisions voted on whether cap the number of homes that could be rented, but the proposals failed.

“People want to sell their homes to the highest bidder, no matter who it is, and they want to be able to rent their home,” says Jamie Shipley, president of the Wakefield Homeowners Association, which governs a subdivision in which 11% of the homes are owned by institutional investors.

Soon after American Homes closed its deal with Mr. McNeilage, the local landlord, it increased rents on some of the properties by hundreds of dollars a month, according to Mr. McNeilage and some of his former tenants. “People who were on month-to-month leases got a real rude awakening,” he says.

American Homes, which owns more than 48,000 houses nationwide, controls nearly half of Spring Hill’s rental homes, leaving aggrieved renters limited choices. “If you want to be in that subdivision and have your kids go to that elementary school, you have to deal with them,” Mr. McNeilage says.

Jack Corrigan, American Homes’ operations chief, says rent increases for tenants renewing leases average 3% to 3.5%, and the company generally restricts larger hikes to new leases. “We try to be very reasonable with all of our tenants,” he says.

When Aaron Waldie moved to Spring Hill for a job in the finance department of a new hospital, he and his wife, Jessica, intended to use profits from selling their California home to buy a new house. Despite offering thousands of dollars above asking prices, the couple lost several bidding wars and settled for a rental owned by Colony Starwood. “It’s a lot more expensive than homeownership,” he said.

Aaron Waldie and his wife lost several bidding wars for homes in Spring Hill before settling for a rental.

To assess how rents sought by Spring Hill’s big four corporate owners compare with the monthly costs of owning the same properties, The Wall Street Journal analyzed information from the companies’ marketing materials and county sales records for 27 homes purchased by the four since the beginning of March. The analysis—which assumed 10% down payments and 30-year fixed-rate mortgages, plus taxes and insurance—found the posted rents on those homes averaged 32% more than the monthly ownership cost.

The average rent for 148 single-family homes in Spring Hill owned by the big four landlords was about $1,773 a month, according to online listings since early May viewed by the Journal. Other landlords also have raised rents, local brokers say.

“The rent is crazy,” says Bruce Hull, Spring Hill’s vice mayor and owner of a local home-inspection business. “It hasn’t been that long since you could get a three bedroom, two bath for $1,000 a month.”

At a recent conference in New York, Mr. Singelyn, the American Homes CEO, told investors that the average household income declared by those applying to rent from American Homes had risen to $91,000, from $86,000 a year earlier.

“Their wherewithal to pay rent today as well as pay rent in the future, with increases, is sufficient,” he said. “It’s just up to us to educate tenants on a new way, that there will be annual rent increases. This has been a very passively managed industry for 30, 40 years up until institutional players came in.”

When rents are significantly higher than the cost of ownership, renters tend to become house hunters. Builders who were sidelined during the recession are rushing to catch up to demand. Spring Hill issued more than 1,100 residential building permits for single-family homes since 2015, and over the past year its planning commission has rezoned and subdivided properties to accommodate thousands more, according to municipal records.
 
David Bowater, with his fiancée, Alexa Callanan, says rent increases on their townhouse in Spring Hill prompted them to buy a house in Columbia, Tenn.

David Bowater and his fiancée were priced out of Spring Hill when the rent on their two-bedroom townhouse rose to about $1,100, from $875, over four years. “It’s cheaper to buy at this point,” Mr. Bowater says.

After bidding on six homes, they won the seventh. The house is even deeper into the middle Tennessee countryside and farther from the restaurants where they work. Mr. Bowater says it is costing him about $100 a month more to own the home than he was paying in rent on the townhouse, but that it is far cheaper than it would be to rent a comparable home with a yard.

“We had to make a big offer,” he said. “I just hope the bubble doesn’t burst and our loan goes upside down.”

 

Categories Economy, Narrative, Office Market

1-Minute Phoenix Metro Office Update: Q1 2018

The long and stubbornly slow recovery continues.  Q1 2018 numbers are out and the Metro Phoenix office market absorbed 686,469 square feet of net positive space, lowering overall vacancy to 19.39%. 

We are now into the 8th straight year of positive absorption in office jobs.  Vacancy varies throughout the Greater Phoenix area with a high of 30.5% in the Sky Harbor Airport submarket, right next door to a low of 9.5% in Tempe.  With such a wide range, I spend a lot of time helping tenants and landlords navigate nuances (opportunities) across geographical areas and product types.

 
Below is a link to our Lee & Associates Arizona First Quarter Office Report and as usual, I’ve included my top 3 takeaways:
 
Tempe is #1 Again– Central Scottsdale spent a short time last quarter as the most occupied submarket (90.5%), but Tempe is back after a strong quarter of tenant demand.
 
Class A Vacancy is 16.7%– Businesses continue to lease the best quality space they can as there is huge competition to acquire and keep their best talent.Southeast Valley Continues momentum– Chandler has nine speculative office projects under construction – a testament to strong demographics and tenant demand in that area of town.  Look for vacancies to rise in this market creating some aggressive concessions.

 
My team and I represent office tenants and landlords throughout Metro Phoenix and the US – and we do international work as well.  Please contact me if we can help you. 
Andrew
602.954.3769
acheney@leearizona.comPS- My partner, Craig Coppola, found this incredible and insightful old-school video on the history of Phoenix.  I hope you enjoy every minute of it.  What a trip back in time!


Click here to read the full report
2018 Q1 Office Report_Page_1
Categories Economy, Narrative

Growing Together

I grew up 20 minutes from the Mexican border.  My dad and three of my siblings still live in Sierra Vista, AZ.  I know firsthand the good and bad of living next to an international border and all the issues surrounding both sides. 

 
Given the recent political turbulence surrounding globalization, NAFTA, and the United States’ strained economic relationship with Mexico, I figured I’d arm my readers with some background information.  For this week’s narrative, I’ve attached a Wilson Center report that goes in depth on the complexity of our partnership with Mexico.

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The report presents data from 2015, but is still relevant today. For up-to-date statistics, here are a few more resources: 

This is not a political dialogue, rather some information to help you learn more about cross-border trade. 

Thanks,

Craig
602.954.3762
ccoppola@leearizona.com


Growing Together: Economic Ties between the United States and Mexico


by Christopher Wilson

Click Here to Read the Full Report

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Click here to enlarge chart

 

Categories Economy, Narrative, Office Market

Underlying Organizational Costs

The biggest waste we consistently see is clients underutilizing their office space.  Planning for growth that never occurs, thinking you “need” the space for visiting people, and making work areas and offices too big — there are multiple ways that companies waste money.

Office space, and even more important facilities, can significantly reduce costs through in-depth expenditure assessments. To maximize cost efficiency, it’s important to remember and consider the following:

  • Workplace satisfaction prompts productivity and retention. AMEN.
  • Invest in the work setting.  The key word here is “invest.”  Your workplace is an investment in your people, culture and efficiency. 
  • Periodically  replace/upgrade obsolete areas and systems.  Do you have a quarterly checklist of items that need to be reviewed, tested or replaced?
  • Strongly address energy and utility systems efficiency. Energy runs between 5-20% of our clients’ facility costs.  There are programs within the local utilities, sensors to turn off lights, energy management systems, and more that can help cut utility costs.  Today’s technology saves money.

Below is a longer article on these topics and a few more.  Looking to make sure you are on top of your costs?  Give me a call or shoot me an email.  We can help.

 

Craig

602.954.3762
ccoppola@leearizona.com


 

Real Estate: The Surprising Cost of Inaction
Are executives overlooking the real cost of underperforming real estate and facility assets?

Tammy Carr
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February 2017

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With real estate and facilities as two of the largest expenses (and assets) for the average organization, it may be surprising to learn a sizable portion of that spend is going toward wasted energy and lost productivity associated with unsuitable and inefficient performance of the physical work environments. This is not just an issue for Fortune 500 companies; increasingly, “middle market” companies, institutions and agencies are finding that conducting assessments of their holdings yields valuable data and results in actionable plans that have a significant impact on their bottom lines. Across industries and commercial real estate (CRE) segments, leadership is paying closer attention to the composition, scope, condition and value of their real estate portfolios.
 
How can executives minimize the drain on capital and expenses associated with the underperformance of their commercial corporate real estate portfolio and its impact on employee attraction and retention? A comprehensive portfolio assessment will analyze both the visible and hidden costs to an organization. Fundamentally, with this knowledge, executives are able to develop and implement strategies that will optimize their portfolio and maximize return on their facilities and real estate footprint.
 
Too often, however, executives are paralyzed by the initial financial investment and/or staff investment that may be required to engage in reversing the trend, even if the internal rate of return may meet or exceed their requirements.
 
The truth is, inaction can quietly kill a bottom line. In fact, hundreds of examples exist that illustrate a variety of ways in which a facility upgrade/renewal/replacement can positively affect a company’s profitability by contributing to overall operating cost efficiency, employee productivity and worker retention.
 
Ignored cost drivers: operations & maintenance
 
The cost of maintaining a space that has deferred maintenance and/or higher-than-average operations and maintenance (O&M) costs, can be surprisingly high. During a recent real estate and facility assessment for a corporate customer, our analysis uncovered inefficiencies within its 10-year-old building resulting in $1.09/square foot annual costs, simply due to subpar energy and systems performance.
 
A renovation or new space investment offers the opportunity for businesses to take advantage of the latest technology to lower utility costs. LED lighting, daylight harvesting techniques, high-efficiency boilers and other mechanical system improvements should all be reviewed for potential ROI. With one of our clients, for example, a small step such as implementing new daylighting controls for a four-floor corporate office reduced energy use from lighting by 45 percent over standard code, with a three-year payback period.
 
It is important for firms to conduct the necessary legwork to benchmark their own performance for O&M costs against their peers. Factors such as location, age, size and type of facility must be considered in the calculation. For the majority of our customers, we typically find they are meeting expected targets in one area, only to be underperforming in other areas. Rarely do firms exceed benchmarks without having begun their operational renewal process with a specific plan and targets in place. Without this understanding, businesses are missing a big piece of the puzzle required to determine the true costs of waiting to make investments with attractive returns.
 
Underappreciated cost drivers: productivity, innovation, recruiting & retention
 
Additionally, while the initial investment involved with a project may seem overwhelming, the truth is it can pale in comparison to an organization’s employee-related costs, which typically amount to 70 to 90 percent of a company’s overall operating costs, according to Gensler Consulting in The LEADER magazine.
 
But do employee-related costs have anything to do with a potential facility project? In short, they have everything to do with it, as numerous studies have shown that office design can have a positive impact on both the productivity and wellbeing of employees. Undertaking a new project offers a business the opportunity to leave outmoded environments behind and construct modern office spaces that can improve employee health, productivity and retention.
 
According to the GSA’s Innovative Workplaces report, businesses lose approximately $1 million per year for the average office building (370 employees) due to poor space planning alone. And those aren’t the only costs. In fact, Gensler’s U.S. Workplace Survey 2016 found that innovative businesses are five times more likely to prioritize modern workspace best practices, and employees operating in these modern workplaces are more likely to innovate.
 
Investing in the workplace does not just pay off in employee performance; it can also help businesses keep those high-performing employees around, as a 2012 study in the Journal of Vocational Behavior found that changes to the work environment can increase an employee’s commitment to the organization.
 
This is important because labor market growth is slowing in the U.S., and constantly recruiting and training new talent is costly. In the US, the labor force is expected to grow only 0.5 percent between 2014 and 2024, according to the Bureau of Labor Statistics, which means the supply and demand shift will be favorable for employees to seek out the best possible workplace environment.
 
Meanwhile, the cost of turnover for average workers making less than $75,000 a year, which covers 9 in 10 workers in the U.S., is roughly equivalent to 20 percent of the worker’s salary. Expect the price tag to increase to 150 percent of salary for turnover of knowledge workers earning around $75,000. Rather than paying those costs over and over again, businesses need to focus on improvements that incentivize employee satisfaction and loyalty.
 
A study commissioned by HASSEL also found that an appealing workplace can double a business’ chances of landing potential employees and a “modern workplace aesthetic” can triple an employer’s appeal.
 
Not only can an organization drastically reduce the costs of turnover, but additionally increase productivity and engagement in employees by providing them with a workspace that suits their needs. Knoll found in a study that a $200,000 investment in workspace capability upgrades, including the quality of meeting spaces, can substantially reduce annual costs with total payback after two years.
 
Identify the true cost of inaction
 
Today, employees may sit in cubicles or half partitions; they may work in an activity-based design or have their own private office — the options are abundant. Each company has different needs and objectives, and it’s essential to find the workplace environment that aligns with the firm’s objectives, while ensuring employee satisfaction and retention within its industry.
 
A facility conditions assessment done right — coupled with benchmarking data and expert analysis — will deliver visibility into hidden annual expenditures, provide insight into potential future surprises, and identify information critical to market valuation for underutilized facilities or properties. Whatever the situation, it’s important to know what underperforming space is costing relative to the income statement. This analysis is essential to planning investments for maximum effectiveness and ROI.

 

Categories Economy, Narrative, Office Market

Businesses are Relocating to AZ

t’s always warm in Phoenix.  In the summer, we go above 110 degrees on a regular basis. On the other hand, the Phoenix office market continues to move along at a steady pace…like it’s 70 degrees.
 
BUT, all is not lost.  Many companies are beginning to realize the true cost of having all their office space eggs in one location basket — namely, Silicon Valley.  It’s not a smart strategy.  The rents are astronomical, their people can’t buy a house within 50 miles, the traffic is a mess and California taxes are some of the highest in the country.Arizona on the other hand has:
–Reasonable rental rates
–Space available now
–Ample people to hire at reasonable salaries. (And if we don’t have enough, don’t worry, more will move here. We are a destination where millennials want to live and raise a family.)
–Reasonable taxes
–Normal housing prices
–You can get around the city
–Pro-business governmentBelow are a series of articles discussing the rapid migration to Phoenix. To read all the articles in their entirety, click here to go to our website. 
 
We understand Phoenix – it’s where we work, raise our families, and engage with the community. It’s our home and our business. Since 1984, we have negotiated successful transactions for premier office tenants locally and nationally, from Metropolitan Phoenix and all over Arizona and beyond. We’re proud to be the leading office brokerage team in Arizona.  We stand ready to work with you when you need a broker.

Craig
602.954.3762
ccoppola@leearizona.com


Goodbye New York, Hello Arizona

By Natalie Sherman

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October 13, 2017

The subway stops near Wall Street are still crammed in the mornings yet financial firms in New York – once the centre of the money universe – aren’t expanding the way they used to.

Companies in far-flung states such as Arizona and Texas are seeing the rise in financial jobs instead.

The shift in part reflects population trends in the US, where states in the south and west – often dubbed Sun Belt states – are growing faster than their counterparts in the north.

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It’s also driven by growth in insurance, investment advice and consumer lending jobs, over the trading and securities roles historically based in New York.

Just as important, companies say, is that new technology and the rise of online banking means they can look more broadly when making location decisions.

“You don’t need to go into a bank anymore. You don’t need a brick-and-mortar building. You can do it from anywhere,” says Gay Meyer, assistant vice president for regional human resources at the banking and insurance company USAA.

“That allows us as a company to think outside of, ‘We have to be in New York or have to be in Chicago’.”

‘Influx of people’

As the economic recovery takes hold and low interest rates persist, demand for home loans, credit cards and other products has picked up.

That’s translated into jobs. The number of finance and insurance jobs in the US expanded by 1.8% over the 12 months that ended in March, finally rebounding to pre-financial crisis levels.

New York remains home to about 8% of those positions. But at the end of 2014, Texas overtook it as the state with the highest number of jobs in the sector.

Meyer is based in Arizona, a desert state on the border with Mexico that is better known for the Grand Canyon than banking. But over the 12 months to March, hiring for finance and insurance jobs grew faster than any other state in the country.

Its rise as a regional financial hub is fuelled by expansions from companies such as USAA, State Farm and Charles Schwab, which have been drawn to the area by affordability, booming population and a large pool of university graduates and potential recruits.

USAA, an insurance and banking firm that serves military and veteran families all over the world, hired nearly 600 people in Arizona last year, as demand for credit cards and mortgages boomed, Meyer said.

 

Forty minutes south, insurance giant State Farm hired about 2,000 people in 2016 and expects to bring on a similar number this year, in roles such as customer service, sales and IT, said Naomi Johnson, a State Farm public affairs specialist. She transferred to the Phoenix-area campus last June after working for the company for 16 years in her home state of New York.

Johnson, 39, said she’s seen the way the job growth is boosting the local economy, spurring new food and shopping spots to open.

She regularly gets calls from builders, checking on hiring – the campus now holds about 6,600 and the firm is aiming for 10,000 – as they start new housing projects.

“I’m constantly sharing that information because they’re preparing for this influx of people,” she says.

Limitless opportunities

New York leaders are aware their lead is slipping.

In 2015, the business association Partnership for New York City published a report titled At Risk: New York’s Future as the World Financial Capital.

It called for “public actions”, such as tax breaks and investment in transport and housing, to keep New York competitive with international rivals and the smaller US cities nipping at its heels.

Now banks are cheering signs of looser regulation under US President Donald Trump.

The tumult caused by the UK vote to leave the European Union last summer has also fuelled hopes that London’s loss could be the Big Apple’s gain.

“There are a lot of discussions with people saying Prague, Amsterdam may be the next financial centre in Europe, but meanwhile the US may get its own share as well,” says Ahu Yildirmaz, co-head of the research institute at payrolls processor, ADP.

“Brexit may actually make New York more of a centre.”

But the momentum outside of New York is unlikely to stop. ADP announced its own expansion in Arizona last year with plans for 1,500 jobs.

‘Not in New York’

Ascensus, a financial company headquartered in Pennsylvania that handles back-office operations for financial advisors, plans to open an office in Arizona this year with about 170 people and room for more.

Chief executive Bob Guillocheau said the industry is in a good position, as the country ages and relies more on private accounts to pay for retirement, college and health care.

For his firm, which provides record keeping and administrative services for the accounts, the opportunities to grow are “sort of limitless”.

But it won’t be happening in New York, he says.

“I grew up in New York. I know that New York has a tremendous amount to offer, but given the nature of our business… it’s not that we need to be in New York City to do that.”

http://www.bbc.com/news/business-39808446


– The number of tech companies in Phoenix has grown by over 350% since 2012.
– 5,000 new “tech jobs” have been created in Arizona since the tech boom started.
– Renaissance Square is improving some of their office space to appeal to tech companies.

 

What’s driving a downtown Phoenix tech boom?

By Brenna Goth

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October 12, 2017

A San Francisco tech company that announced an expansion from Silicon Valley to downtown Phoenix last week cited a lively business climate and a light-rail stop as primary factors in choosing the city.

Representatives of a semiconductor packaging company moving its corporate headquarters in May from California to south of Phoenix Sky Harbor International Airport said the city is cost-effective and has the workforce they need.

These recent examples are part of what Phoenix leaders say is a flood of tech industry leaders and startups looking to open in the city. Mayor Greg Stanton highlighted the growth in his State of the City speech on April 25.

Stanton said the number of tech companies downtown has nearly quadrupled in the past five years. He credited adaptive reuse projects in the Warehouse District and new tech hubs as a source of the success.

The numbers Stanton used include more than the central core, according to the Community and Economic Development Department. The increase encompasses the area from Buckeye Road to Indianola Avenue between Seventh Street and Seventh Avenue.

But Phoenix economic development leaders agree the most notable noticeable uptick is in the city center.

“Throughout the city, we see how innovation breeds innovation,” Stanton said in his speech.

Phoenix offers ‘sense of community’

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Keith Evans of Wespac Construction walks through the lobby area of Renaissance Square on April 27, 2017, in Phoenix. Renaissance Square is undergoing rennovations to attract a younger, tech-oriented, workforce to its building. Phoenix has seen an increase in tech companies in recent years. 

Since 2012, the number of tech companies in the roughly 4-mile stretch grew from 67 to about 260, said Joseph MacEwan, research assistant for the Community and Economic Development Department.

The department used a combination of data from the Maricopa Association of Governments, which tracks companies with five or more employees, and the city to calculate the increase. The department filtered data for tech companies, MacEwan said.

Over the same time period, technology jobs in that area increased from about 1,800 to more than 7,000, according to the Community and Economic Development Department. Technology jobs, however, are tracked more closely now by the city than in 2012, a spokesman said.

GROWTH:  Is sunshine and affordable homes enough to bring high-paying tech jobs?

The city’s definition of tech jobs isn’t represented directly in federal numbers, but U.S. Bureau of Labor Statistics data show employment in industries like manufacturing, trade and financial activities has increased in the past year in the greater Phoenix area.

Most cities market themselves as walkable, connected and a good place to live, said Christine Mackay, Phoenix Community and Economic Development Director. But she said Phoenix highlights that every company has room to grow here.

“What people are really grabbing onto is a sense of community.”

Christine Mackay, Phoenix Community and Economic Development Director

“What people are really grabbing onto is a sense of community,” Mackay said.

Upgrade, Inc., the San Francisco credit platform company moving downtown, plans to hire about 300 people in the next two years, according to a press release. The company will take two floors of the Renaissance Square building, which is undergoing a $50 million renovation on Central Avenue.

The energy of downtown compared to other parts of the city is one factor tech executives cite in choosing the location, Mackay said.

“That’s more of the vibrancy they’re looking for,” she said.

But big moves go beyond Phoenix’s center. Last week, the city announced the new corporate headquarters of RJR Technologies, Inc., the semiconductor packaging company based in California.

The move will add about 100 jobs south of the airport, according to a press release.

The company cited “financial advantages” over California and a “cost-effective and stable business environment,” the press release said. RJR Technologies already had a small office here.

Building makeovers aim to draw tech

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Mark Majerus, security supervisor at Renaissance Square, walks the 15th floor on April 27, 2017. The building to undergoing extensive renovations to help attract tech companies that could relocate to Phoenix. (Photo: Mark Henle/The Republic)

Some downtown developers are building new office space to attract tech companies. Others are renovating existing spaces to make them more appealing to that workforce.

Companies today are looking for a type of office that’s different than what was built in previous decades, Mackay said. They are asking for big, open spaces and natural light as well as common areas that promote collaboration, like “high-top tables where you can charge your phone,” Mackay said.

Downtown sites like the 111 West Monroe Building and the Heard Building, for example, recently renovated office suites and highlight their walkability, architecture and local retail tenants.

Renaissance Square just started construction on upgrades to its lobbies, elevators, conference room and office suites. A second phase will improve the connection between the two towers and repurpose 3rd-floor tennis courts into outdoor space, said Mark Wayne, principal of Cypress Office Properties, LLC., that owns the building in a joint venture with Oaktree Capital Management, LP.

The improvements will make the building, constructed in the 1980s, more attractive to both Millennial workers and employers that want to attract and retain top talent, Wayne said. Outdated and dark lobbies will transform into places where people can connect and get out of their individual offices, he said.

The movement of tech companies to downtown Phoenix is clear, Wayne said. They are transforming a business area that used to be dominated by law firms and government offices, he said.

“Our strategy is to meet that demand,” he said.

 

http://www.azcentral.com/story/news/local/phoenix/2017/05/01/downtown-phoenix-tech-industry-boom/100950480/


– Boeing moved to Falcon Field Airpark in Mesa from Seattle, Washington.
– The division of Boeing plans to be fully moved in to Arizona by 2020.
– Other divisions are moving from Seattle due to costs of working there.
– Mesa employees will be paid less than Seattle employees.

 

Boeing plans to shift hundreds of jobs to Arizona

By Dominic Gates

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October 13, 2017

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Boeing plans to transfer a substantial piece of the work of its Shared Services Group out of the Puget Sound region. Potentially hundreds of jobs will move to Mesa, Ariz. The company hopes to avoid layoffs and to shed many of the jobs here through attrition.

Boeing plans to transfer yet another substantial work group out of the Puget Sound region, the company confirmed Wednesday. The work shifting to Mesa, Arizona, will involve hundreds of jobs.

The changes are coming at Boeing’s Shared Services Group (SSG), which employs about 3,000 people in the Puget Sound region and provides a wide range of support services to Boeing’s corporate and production units.

The unit’s leadership has initiated a sweeping review and has begun to inform specific groups that their work is pegged for moving.

It’s part of Boeing’s intense corporate drive to cut costs, which is largely responsible for the loss of more than 18,300 Boeing jobs in the state since the most recent employment peak in fall 2012.

Boeing aims to complete the SSG reorganization by 2020, but SSG president Beverly Wyse will move from Renton to Mesa sooner.

Wyse, a longtime Boeing exec who previously ran Boeing’s South Carolina complex and headed the Renton 737 assembly plant, said the reorganization will also take out some layers of management and is aimed at making SSG more efficient and productive.

Wyse said managers have begun meeting with employees and working out details. At this point, she said, it’s too early to tell how many jobs will be moved.

“In the next six to eight weeks, we’ll understand everyone’s preferences and develop a transition plan for each employee,” Wyse said.

In one affected group, a person with knowledge of the plan said Boeing will offer relocation packages to just 5 to 10 percent of the current employees who are considered critical to the work.

To stay at SSG, the person said, others will have to reapply for their jobs and accept a lower salary offered in Mesa.

Wyse said the terms of the work transfer will differ from one work group to another.

“We are working through service by service what proportion of each team has critical skills that we have to transfer,” she said.

Job cuts by attrition

SSG, which at the end of May employed almost 5,900 people companywide, provides more than 100 services across Boeing.

Some are specific to each work site, such as security and fire protection, building and equipment maintenance, and real-estate management.

Other SSG groups are responsible for broader services across the entire Boeing enterprise, including human-resources functions such as pay and benefits; back-office functions such as management of company vehicles, travel expenses and accounts payable; business planning; purchasing non-production equipment and office supplies; and managing the logistics of delivering aerospace parts to Boeing plants across the country.

The groups providing services all across Boeing are the ones tapped for moving to Mesa, Wyse said.

About half of the total SSG employees are now based in the Puget Sound region, she said.

And because many of their jobs relate to the specific production sites here, “the Puget Sound is our largest footprint and it’ll continue to be our largest footprint” even after the work transfer, she said.

In addition to transferring work to Mesa, the reorganization will reduce jobs through attrition.

With the Puget Sound business economy booming, driven by tech companies like Amazon, attrition in some of her business-services groups is as high as 8 to 12 percent per year, she said.

Since Wyse took over as head of SSG in June last year, total employment in the group already has dropped by just over 1,400 people.

Employees rattled

Boeing has transferred work out of Washington state steadily since 2013.

That year, it announced the move of 1,500 IT jobs to St. Louis, Missouri, and North Charleston, South Carolina; nearly 700 commercial airplane engineering support jobs to southern California; and 1,000 research engineering jobs to Huntsville, Alabama; St. Louis and North Charleston.

In 2014, it announced the transfer of 1,000 more commercial airplane engineering- support jobs to southern California and then 2,000 defense-side jobs to Oklahoma City, Oklahoma, and St. Louis.

Most of the employees affected by those earlier work transfers were members of the white-collar Society of Professional Engineering Employees in Aerospace (SPEEA) union.

In contrast, most SSG employees are nonunion. About 140 SPEEA members work in facilities for SSG and will not be affected by the work transfer, Boeing said.

Wyse said she’s striving to make the process of moving work to Mesa a humane and deliberate one that gives “the people who have gotten us to where we are today the opportunity … to make a respectful transition.”

She said she is hoping for “minimal, if any, involuntary layoffs” as some employees leave for other companies and others find positions in Boeing’s other operations here.

She said SSG employees working in finance, planning or supplier management can look for jobs within the Commercial Airplanes unit that demand similar skills.

“We’ll give this a long tail,” Wyse said. “People deserve the opportunity to find a good transition.”

However, employees are understandably rattled.

One young SSG analyst said an all-hands meeting last week raised fears of job losses without providing any reassurance about the chances of still having a future at Boeing.

“We didn’t get good answers,” the analyst said.

He said he understands that Boeing needs to be more competitive and cut costs. He said SSG has many inefficiencies, such as multiple databases that don’t interact so that it’s difficult to track total spending.

Still, he said, the company needs to be less “heartless” in making decisions that profoundly affect employees and their families.

He’s now actively looking for another job.

“Boeing will do what it needs to do to survive,” the analyst said. “So will I.”

 

https://www.seattletimes.com/business/boeing-aerospace/boeing-plan-could-shift-hundreds-of-jobs-to-arizona/


– Phoenix is the 6th largest city in the nation
– Phoenix rated one of the best cities for young professionals
– AZ quality of life is high while the costs of living are low

 

Why Businesses Are Moving to This Valley Instead (Hint: It’s Not Silicon)

The Mayor of Phoenix and two local companies talk about why the Valley of the Sun is great for business.

By John Boitnott

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October 12, 2017

Silicon Valley has long been considered the tech hub of the U.S., with many of the top companies in the world keeping their headquarters there. However, as housing prices and the overall cost of living have increased in the San Francisco Bay Area, many startups are jumping ship and choosing alternatives, bringing jobs and economic growth to other cities and states.

I’ve done stories on the scenes in VegasPortlandNew York City and Austin over the years. People write all the time about Seattle, Denver, Houston, Chicago and more. But one that never crossed my mind was Phoenix, Arizona. Turns out the country’s sixth largest city (who knew?) is one of the top metro areas experiencing an injection of innovative companies.

Yelp, Uber, and Shutterfly have all recently opened offices in Phoenix, drawn by lower housing costs and hot weather. City officials hope this draws more new tech businesses to the area. The city has also recently been called one of the best cities for young professionals in the U.S.

“No city in the country has gone through a greater transformation,” says Phoenix Mayor Greg Stanton. “Especially in the downtown area where you see this unbelievable building boom, particularly residential. People are moving to the heart of the city in a magnitude that has never happened before.”

I spoke to Mayor Stanton about the city’s transformation in recent years, as well as two executives who have been part of that change, and have found great success with their Phoenix-based companies.

A diversifying economy

If you haven’t been to Phoenix lately, you’d be excused for thinking the city’s economy was still reliant on “real estate on the desert’s edge,” as Stanton puts it. The bustling desert metropolis is seeing transplants arrive at a fast pace from all over the country now, and the economy has diversified along with that. Stanton points to the opening of a new bio-science campus in the heart of downtown, along with the influx of tech companies from Silicon Valley.

inRead invented by Teads

“The quality of life (is so high) and the cost of living here is so much less,” says Stanton. “So many companies are discovering Phoenix, either moving their entire operations or at least major operations, growing here in Phoenix because they know that they can get a sophisticated workforce at a significantly lower cost than Silicon Valley…That combined with ‘hashtag-yes Phoenix,’ which is sort of our name for our converging startup and entrepreneurial community. You get those cross-pollinating, our existing startup community combined with all these people moving in from Silicon Valley, we got something special going on here.”

Staying close to home

The Valley of the Sun isn’t just a place where people bring their companies for a better shot at success. It’s someplace where companies get their start and grow. Marketing-software company Infusionsoft is an example of that and is a tech darling of sorts in the area at this point. It started in the Phoenix suburb of Chandler in 2001, with no goal to grow into a large corporation, according to CEO Clate Mask.

They operated in survival mode as they developed customized software for a small list of clients. Mask and his team worked long hours for years before developing the software package that was the predecessor to Infusionsoft. It eventually grew from being a small family business to a thriving startup, to a popular solution now used by companies all over the world.

“I wish I could say we had this grand vision of what we were going to do, but we were just building the business in our backyard because we were already in Phoenix, and that was home to us,” Mask says. “So that’s why we built it there.”

Growing in place

Even as one of the fastest-growing private companies in Arizona, Infusionsoft has no plans to move. The company has about 600 employees and more than 140,000 users. Not only is Phoenix home for Mask and his employees, but he has hired top executives who don’t even live in Phoenix. They fly in from Silicon Valley and other locations around the country each week, often doing a four-day work schedule in Pheonix, and a 3-day break back at home.

“It’s all about the culture,” Mask says. “If you’ve got great culture fit and people who are totally passionate about helping small businesses succeed. Then, if they’ve got the right skills, then we want to bring them into the Infusionsoft culture. And they’ll travel for that. They’ll come be a part of that because they see what we’re up to and they have a passion to help small businesses succeed in sales and marketing automation.”

Why one company moved to Phoenix from the Bay Area

Popular mattress seller Tuft & Needle is an example of a company founded in Silicon Valley that needed a change of scene. J.T. Marino and his co-founder didn’t want to build the typical Valley startup. They realized that they could achieve that more easily in Phoenix.

“We saw it as one of those fundamental problems in the mattress industry that being on the open market really drives towards higher prices, higher margins, lower costs, and sales tactics which has really what got this industry in this conundrum in the first place,” Marino recalls. “This is why we set out to solve these issues. So we saw this (moving to Phoenix) as important to essentially, kind of stay pure, stay employee owned.”

Like Infusionsoft, Tuft & Needle has seen big growth during its time in Phoenix. Founded in 2012, the company has 150 employees and an annual revenue of more than $100 million. By locating there, the company was able to avoid the high San Francisco Bay-area rents, and they wisely chose to put some of that savings toward purchasing their own building. They’ve accomplished all of that without taking funding, which is something they likely wouldn’t have been able to do if they’d chosen to stay in Silicon Valley.

“I can pay myself and our team members better proportionally here than there,” Marino says. “So we have a better lifestyle. It’s not like a premium, high sought-after place. There’s a lot of weird economic influences that are happening in cities like New York, and San Francisco and L.A. I view it like it’s a weight that is holding you down.”

A different kind of job applicant

Marino says company turnover is close to zero and during the interview process, candidates are more interested in the type of work they’ll be doing and the future they’ll have with the company. In Silicon Valley, interviewees are more likely to ask about exit strategies and being vested.

“They’re not viewing it like a gamble, like to cash out or something like that versus when I interview people from some other places, the conversation goes very differently so people here are thinking more long term,” Marino says. “They’re not thinking, ‘I’m going to vest, and then I’m going to leave and go join another start-up.’ They’re thinking, ‘Why would I work here? How am I going to grow?'”

Little things like that are a big reason why companies are setting up shop in Phoenix and then attracting knowledge workers. Another reason, according to Mayor Stanton, is that the city doesn’t have a lot of “old boy networks.”

“Those companies that grow to be Fortune 500 companies in other cities, in older cities, haven’t had that chance yet here in Phoenix,” Stanton says. “We don’t have a lot of old boy networks which means if you come to Phoenix, the only thing holding you back from just killing it in this town is your own work ethic and willingness to build your career. And that’s why we keep consistently popping up as one of ‘the best of’ for starting up a business, ‘the best of’ for young professionals. The future of the U.S. and the future of Phoenix are one in the same. We have a wonderfully diverse population, soon to be a majority Latino population, so we’re diversifying ahead of America and how well we do here is gonna be a real indicator of how well America does. That’s another reason of why Phoenix is so important.”

https://www.inc.com/john-boitnott/bwhy-businesses-are-moving-to-this-valley-instead-hint-its-not-silicon/b.html


– State legislation passed in 2015 made for a more friendly business environment in Arizona.
– AZ is rated one of the top 10 states to do business, according to Chief Executive.

 

Businesses On The Move To Arizona

By The Governor’s Office

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October 12, 2017

Arizona has always served as a trailblazing model for the nation to follow. Now, as other states move backward, businesses and the jobs they bring are turning to our state to grow and thrive.

BBC News recently published an article about how financial firms—looking for a place to thrive—are saying, “Goodbye New York, Hello Arizona.” The story notes that, over the 12 months leading to March 2017, hiring for finance and insurance jobs in Arizona grew faster than any other state in the country:

“The subway stops near Wall Street are still crammed in the mornings yet financial firms in New York—once the centre of the money universe—aren’t expanding the way they used to.

“Companies in far-flung states such as Arizona and Texas are seeing the rise in financial jobs instead. . . .

“. . . Meyer is based in Arizona, a desert state on the border with Mexico that is better known for the Grand Canyon than banking. But over the 12 months to March, hiring for finance and insurance jobs grew faster than any other state in the country.”

 

We’re leading the nation when it comes to embracing the 21st century for financial services and many other sectors of the economy.

 

We passed legislation in April 2015 making it easier for entrepreneurs to get the financing they need to open and expand. Since then, we’ve made a number of policy improvements to build upon that success and ensure that businesses can continue to flourish in our state.

 

That’s why Chief Executive ranked Arizona as one of the Top 10 states in the U.S. in which to do business when the magazine released its annual rankings last week.

 

It’s the same reason Kiplinger wrote this month that Arizona is “poised to do well as more tech firms relocate from Calif. and elsewhere to the Grand Canyon State, where the operating costs are lower and the regulatory climate is friendlier.”

Arizona is the place to be.

Steve Forbes, editor-in-chief of the eponymous Forbes magazine, highlighted our state’s economic success in his newest column:

“While all eyes on are on Washington these days to see how well the bold Trump agenda advances, Arizona Governor Doug Ducey is quietly creating a case-study in how to achieve economic growth and create the jobs of the future. He is luring high-tech innovators, attracting scores of start-ups, and incentivizing corporate expansion. . . .

“. . . Governor Ducey should be a role model for conservative chief executives, legislators, and city leaders throughout the nation. What he accomplished in Arizona can be duplicated by any other state that is willing to work with tech companies and other businesses to help them succeed.”

There’s certainly still work to do, but—with the lowest unemployment rate since 2008, higher credit ratings and consumer confidence, and a real-estate market on the rise—let’s keep up the momentum and continue being a state where workers, businesses, and entrepreneurs feel welcome.

https://azgovernor.gov/governor/blog/2017/05/businesses-move-arizona


– Rogers Corp. has a 180-year history in Connecticut   
– Rogers Corporation, Carlisle Group, and Kudelski Group are all moving to Arizona.

 

 

BREAKING: New global corporate headquarters headed to Phoenix area

By Eric Jay Toll

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October 12, 2017

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Arizona just landed its third corporate headquarters relocation this year.

 

Rogers Corp. (NYSE:ROG), an engineered materials solution firm, is moving its global headquarters from namesake Rogers, Connecticut, to Chandler.

 

The company already has a major business and manufacturing process in the city.

 

Bruce D. Hoechner, president and CEO of Rogers, said the decision supports the company’s long-term strategy and is an integral part of its plans for growth and expansion.

 

“Relocating our corporate headquarters to Arizona improves our access to the growing business and technology centers on the West Coast,” Hoechner said.

 

Rogers Advanced Connectivity Solutions division is headquarters in Chandler, and has been in the area for 50 years. The company has 400 Arizona employees. Another 70 corporate employees will make the move to the Southeast Valley as part of the headquarters relocation.

 

Carlisle Group from Charlotte, North Carolina, and Kudelski Group, from Switzerland, both announced corporate relocations into the Valley this year. Cardinal IG is building a regional headquarters in Buckeye, and Farmers Insurance also announced a major regional headquarters in Phoenix this year.

 

Rogers Corp. has a history going back more than 180 years, founded in Connecticut in 1832. It is retaining a manufacturing, research and development center in Connecticut. All the corporate functions — human resources, information technology, finance and technology — are relocating to Chandler.

 

The company operates facilities in the U.S., China, three in the European Union and South Korea. All global functions will be administered from Arizona.

 

https://www.bizjournals.com/phoenix/news/2016/08/08/breaking-new-global-corporate-headquarters-headed.html

 

Categories Economy, Narrative, Office Market

10 Issues Affecting Commercial Real Estate 2017

One thing I constantly stress to my team is that to be successful in this industry, you have to be willing to learn and adapt to the times, or quickly become obsolete and watch your business disappear. As a 20+ year Counselor of Real Estate (CRE), I love our annual top ten issues affecting commercial real estate. They are thoughtful, insightful, and always ahead of the curve.  Below is this year’s Top 10.
 
Here are my top 3 (But be sure to read below as there are 7 others that are equally important):

  1. Retail Disruption – Customer traffic is now being driven by “Experiential” retail like restaurants, entertainment centers, and gyms rather than traditional brick and mortar. (See our special report on retail here)
  2. The Technology Boom – A major study of automation by McKinnsey & Company suggests that up to 47% of today’s jobs could be replaced by automation. Disruption is no longer coming, it’s here. 
  3. Polarization and The Effect on CRE – The current political uncertainty about changes to trade, travel and immigration policy threaten cross-border investing, hospitality properties, retail, and manufacturing supply chains. 

Keeping our readers (and our clients) up to speed on Commercial Real Estate is the purpose of this narrative.

Craig

602.954.3762
ccoppola@leearizona.com

P.S. It’s time for a critical rose ceremony. Who will go home, and who will have the chance to meet the architect? Watch the video to find out!

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The CRE 2017-18 Top Ten issues Affecting Real Estate

 

1. Political Polarization and Global Uncertainty

Political Polarization and Global Uncertainty are impacting decision-making at every level of government and throughout the business community.  On an international level, recent elections in the U.S., France, Austria, the U.K. and other countries point to resurging nationalism, testing existing diplomatic and trade relationships around the globe as exemplified by Brexit and NATO.  Potentially devastating military conflicts seem more likely in Asia and existing conflicts in the Middle East are more volatile.

Even at the local level, there is continuing and intensifying polarization between and within political parties, making it virtually impossible for representatives to find the common ground needed to resolve differences and move ahead. Decisions cannot be made when compromise is viewed as weakness and people with differing points of view have difficulty being in the same room. If people struggle to express and hear divergent opinions, it will be nearly impossible to address existing and emerging problems going forward.

Negative implications on real estate are immediate. Uncertainty about changes to trade, travel and immigration policy threaten cross-border investing, hospitality properties, retail, and manufacturing supply chains, among other effects.  Rising interest rates and retail inflation will make middle-class homeownership that much more difficult.  Longer-term implications could be much more severe, as polarization prevents long-term fixes to issues such as infrastructure, affordable housing, local and state pension liabilities, and education.  And so, one or both of these trends affects virtually every issue on this year’s list and a host of others that didn’t make the cut.

 2. The Technology Boom
The tech start-up boom is revolutionizing real estate operations across the board.  One of the biggest changes this year is not a killer app, but an unprecedented wave of commercial real estate technology innovations that are expected to change the way real estate is bought, sold, and managed.  Commercial real estate tech start-ups were impressive in 2011, with $186 million invested. This has grown exponentially. In 2016, investment reached $2.7 billion. MIT’s real estate innovation lab has identified 1,600 real estate tech start-ups worldwide.

Robotic learning, a research field testing robots that can acquire new skills and adapt to their environment, has accelerated automation of the workplace. This year, robots showed that they can work as teams, learn from videos, and rely less on specialized human programmers. Thirty percent of banking jobs are expected to disappear in the next decade, and fully robotic lettuce farming is expected to open in Japan this year. A major study of automation by McKinnsey
& Company suggests that up to 47% of today’s jobs could be replaced by automation.

Big Data has  come to real estate planning, and space planning decisions are now informed by real-time information.  Autonomous vehicles, especially trucks, are projected to go mainstream.  Automated cars could knock 85 percent off taxi and ride-share costs, competing favorably with car ownership.  When autonomous vehicles cost less than cars, we’ll need to find something else to do with our garages, parking lots, and much of our streetscape. Reliable, fast, complete information also drives the sharing economy, as tech savvy users drop ownership in favor of dependable access.

In retail, the question has shifted from “Do you shop online?” to “How many deliveries did you have today?” Online retail continues to drive warehouse demand – but each foot of new warehouse space leased by online retailers translates into eight feet of vacant retail. Smart lenders and investors are already insisting that new construction reflect future demand patterns, not those with which we are currently familiar.

Get ready to change uses – you won’t need as much parking or retail, and anything that can be shared will be. Financing commercial construction will require this kind of foresight.  Homes with features that take advantage of these trends (secure package dropoff and access to bandwidth) will also draw more attention in the marketplace.

3. Generational Disruption
Boomers’ and Millennials’ divergent views of where they live, work, and play increasingly impact the property markets.  The Baby Boom generation of approximately 74.0 million (born between 1946 and 1964) is now smaller than the Millennial Generation of some 75.4 million (born roughly between 1980 and 1997).   A significant number of today’s real estate decisions, as well as those connected to the workplace and consumer spending, are made by people under the age of 40.  Yet Boomers, too, remain engaged, continuing as productive members of  the workforce in increasing numbers far beyond the traditional retirement age of 65. Millennials are moving into management positions and looking to raise children and own homes at the same time that Boomers seek to downsize or age in place.  The generations are crossing paths everywhere:  in the workplace, in housing and at the local bar and grill, intersecting and sharing spaces, despite their often disparate priorities when it comes to the built environment.

Studies project that Millennials will ultimately behave in a fashion similar to Boomers – but do so ten years later.  This generation is characterized by:

  • Leading a more transient, “experience-oriented” lifestyle in their 20s.
  • Marrying, having children, and buying homes in their 30s as opposed to their 20s.
  • Living in the city before moving to the suburbs (or rapidly emerging “urban burbs”) in search of the larger, more affordable home and better school.

Boomers, on the other hand, are exhibiting behaviors often associated with Millennials:

  • Transitioning to a more transient, “experience oriented” lifestyle in their 60s.
  • Selling their homes and renting (in the same buildings as younger generations).
  • Abandoning the suburbs for city living (or choosing urban like locations a bit further out).

Real estate developers, investors, owners, and builders will need to understand not only the location preferences of each group, but the design and amenity features of housing units, whether rental or owner occupied.   One size will not fit all and supply will need to match rapidly changing demand.  In coming years, Boomers will be looking for aging options and amenities while Millennials, with an ingrained reliance on social media, will prioritize “networks” offering product knowledge and immediate, online access to goods and services.

At work, Boomers tend to favor the traditional office design of earlier generations, an onsite work environment, and structured schedule. Millennials, now entering the work force in large numbers, prefer “collaborative” office designs and flexibility in where and when they work.  Particularly interesting is the new dynamic which places these diverse interests side by side.  While employed Baby Boomers tend to be the decision makers in their workplace, a shift is underway, as Millennials literally climb the ladder – no longer to the corner suite – but to the standing desk in the middle of an open office arena with a private “wellness room” and exposed kitchens and snack bars.  The challenge for builders, landlords, owners, and tenants alike will be in finding an acceptable design balance that appeals to the contrasting audiences they serve – now and in the future.

4. Retail Disruption
The trend toward transforming retail into “experiences” continues to develop, and is offsetting shrinkage in the physical “bricks and mortar” consumer goods platform.  “Experiential” retail drives customer traffic to a more diverse and highly participatory environment targeted to a variety of age groups and interests.   This sector has transitioned into a kind of “Omni Channel”– encompassing e-commerce, reduced or repurposed physical elements, and a host of previously unforeseen spaces, both physical and virtual – with a current emphasis evolved from bricks and mortar shopping to the timely, efficient transfer of goods from source to inventory to consumer.  Many traditional retailers are adopting an “Amazon-like” approach, creating new warehouses, new distribution methods, and new fulfillment models (same-day deliveries, easy return methods, etc.). An irony of this is the recent embrace by  “disruptive retailers” such as Amazon of the traditional retail model characterized by the opening of physical stores, which allow consumers to “see, feel, and return” what they purchase.

It is no secret that the U.S. has been “over-retailed” for decades.  In a recent study by Cowan and Company, the United States boasts 40% more shopping space per capita than Canada, five times more than the U.K. and ten times more than Germany.  Retailers unable to profitably transition into the multi-faceted new format have been forced to shutter physical stores, migrate into virtual space, or discontinue operations entirely.   Such stalwarts as Sears, Macy’s, and J.C. Penney join countless other retailers in being forced to close multiple stores throughout the country, leaving malls anchored by these legacy retailers scrambling to reposition huge empty spaces or go out of business altogether.

Despite this massive repositioning, we are not by any stretch of the imagination facing a “Retail Apocalypse.” Restaurants have boomed in recent years and service-oriented outlets  take up ever more space.  Grocery-anchored malls remain steady – at least for now, although change is afoot as grocery models join the fray and prepare to reinvent themselves.  Retailers who cater to a fresh or appealing niche in the marketplace are thriving, exemplified by “fast fashion” venues such as H&M and Zara which turn out, at highly affordable prices, versions of high fashion designs within weeks of their appearance on the runway.  As retailers refine their inventories, distribution methods, and fulfillment models, the retail market will survive and even prosper – but will do so in fresh, new ways.

5. Infrastructure Investment
While both major U.S. political parties appear to support substantial investment in infrastructure, it remains unclear when and if the United States Government will be in a position to move major initiatives forward any time soon. However, initial conceptual plans released by the Trump administration indicate a relatively limited Federal Government investment, placing heavy reliance on local and state governments and public-private enterprises.  Politics aside, this approach presents important opportunities for the private sector which is directing significant funds to infrastructure projects, recognizing the need for – and longer-term rewards of – investment in roads, bridges, tunnels, ports, and airports.  Blackstone plans to create a $40 billion infrastructure fund this year.  They are not alone. Prequin, a leading source of data and intelligence for the alternative assets industry, reports that investors now oversee $376 billion in U.S. infrastructure dollars.

While political winds continue to blow in many different directions, it is clear that the need for infrastructure investment is critical.  The movement of goods, which involves everything from ports to airports to warehouses to roads, highways and railroads, is further straining an aging and highly vulnerable interior framework.  Add to this the need for pipelines, electricity transmission, and water distribution, and the immediacy of infrastructure needs becomes even more pronounced.

Major changes in global transportation routes are also driving infrastructure development. This is exemplified by the Panama Canal, the undisputed catalyst for port development in such cities as Houston, Savannah, Charleston, and other ports along the Eastern seaboard.

How the infrastructure challenge is met — or not met as the case may be – will have major real estate implications.  Reliance on public-private investment means projects must havestrong revenue-generating capacity to be funded — something most rural projects and many water, electricity, and road undertakings cannot achieve,  particularly in struggling communities.

Public transit, which has emerged as one of the most critical investment criteria of institutional investors, cannot meet revenue requirements of public-private funds. Initial federal budgets have zeroed out public transit investment, a dramatic problem for many communities and real estate investments.  The sheer volume of need is also a concern, as state and local financial resources are severely limited due to pension liabilities and limited ability to raise additional revenue.

6. Housing: The Big Mismatch
Safe, decent, affordable housing has been shown to have a stabilizing effect on urban economies, crime, and public health.  A current lack  of inventory has generated a spike in home prices and, as a result, declining affordability for many home buyers, particularly those in lower income sectors.   A critical disparity exists between housing needs and housing supply. Although improving home prices, economic growth, mortgage accessibility and rental development have improved housing access and affordability in many areas, a confounding series of supply-demand mismatches continues to severely impact markets worldwide.  While the United States increasingly wrestles with the issue, a recent study of 300 metropolitan areas around the world ranked North America as a market with far fewer affordability problems than most.

An especially serious issue is the growing affordability gap and limited availability of housing in locations with significant job growth, particularly in major metropolitan areas and coastal regions.  Those working in technology, finance and other highly paid fields have monopolized new, resale, and rental product, raising prices on once affordable rental and for sale housing and creating a crisis for lower paid workers and those who are unemployed.   Younger workers seeking employment opportunities, many carrying substantial student debt, remain priced out of the owner market.  Developers have only begun to address the potential for starter home construction (as was done in the 1940s and 50s) as land and construction costs (as well as regulatory constraints) have created price points that are simply too high to interest those  who might otherwise build or invest in entry-level housing.

In other markets, Baby Boomers seek transitional rental housing, but the lack of multifamily rentals with sufficient space and of buyers for the large homes in distant suburbs they wish to vacate have made this shift in lifestyle a true challenge for an older generation wishing to remain active and engaged.  Insufficient  investment in public transportation,  government limitations on “mother-in-law” and micro units, and creative solutions to what could become an affordability crisis exacerbate the problem – widening the gap, real or perceived, between the “Haves” and “Have Nots” and potentially creating even greater problems long term.

7. Lost Decades of the Middle Class
After successive post-recession years of insignificant gains, median household incomes in the U.S. rose in 2015 by 5.2% to $56,516. Still, despite this welcome increase,middle class incomes have yet to recover their pre-recession highs ($57,403 in 2007), and are actually hovering below inflation-adjusted levels from almost two decades ago ($57,909).  Battered by automation and outsourcing, middle class jobs are still under pressure as the U.S. economy transitions from manufacturing to services.  Middle class disenchantment has been linked to the current rise of populist candidates in many countries; global economic and political uncertainty are intimately tied to a large proportion of the voter base disappointed with what government leaders and the business elite have delivered so far.

Retail properties serving primarily middle class customers are bearing the brunt of store closures. Malls with tenants serving high income buyers are faring relatively better.  Rising costs of living and student debt levels suggest that home purchase decisions will be postponed by the young.  Rentals will not necessarily benefit in the most expensive, desirable urban locations; supply growth in multifamily housing counterbalances demand, and stagnant income levels constrain rent growth.

8. Real Estate’s Emerging Role in Health Care
The U.S. spends over $3 trillion each year on health care, or nearly $10,000 per person. That’s double the average for developed countries worldwide, but U.S. health outcomes and efficiency are poorly ranked in comparison to the rest of the industrialized world.  While political polarization is making it difficult to address quality and access problems, the real estate industry has emerged as a major player to cost-effectively improve people’s health.  Medical services are increasingly being delivered in clinics, urgent care facilities, and ambulatory surgery centers, reducing costly hospital visits.  Virtual care – bundling  digital and wireless (video conferencing, email, photos, etc.) and home and mobile monitoring of patients – is expanding rapidly as security and access problems are resolved.  Applied data analytics also help in this “everywhere care” model.

Building occupants are increasingly demanding that the space they inhabit be designed, constructed, and operated in ways that advance positive health outcomes. It makes intuitive sense that buildings could help or hurt health in that people spend 90% of their time indoors. Research from the Mayo Clinic also concludes that only 20% of health comes from health care, with environmental and behavioral factors accounting for 40%.
Evidence of the importance of this trend is that most major real estate professional groups have recently ramped up their focus on healthy buildings.  Designing buildings to specifically address health behaviors has become the most transformative and rapidly growing subtrend of the “Health and Well Being” macro-trend.

Dramatic growth in business interest is a key factor driving this trend. According to Fidelity’s annual national survey of corporations, over 90% of companies have some form of health management or wellness program with approximately 80% also utilizing incentives.  Powerful recent research on the impacts of carbon dioxide on white collar worker cognition (increase by 61% to 101%) and how adjustable desks affect worker productivity (46% increase) also provide a partial explanation. New and cheaper technologies have also helped.

However, it was not until the emergence in late 2014 of the WELL Building Standard, with over 102 building interventions tied to scientific and medical research, that occupants became more actively involved in the healthy buildings movement. The International WELL Building Institute has registered or certified over 450 projects in 28 countries to become WELL Certified.  With adoption by many leading corporations like Wells Fargo, TD Bank, Deloitte, EY, Microsoft, Genentech, McKesson and investors including Oxford, Cadillac Fairview, Kilroy Realty, Hines, Lendlease, Grosvenor, and AXA, future growth prospects are strong.

9. Immigration
The Trump administration has attempted to enact more restrictive immigration laws, emphasizing concerns about security and terrorism while appealing to a voter base concerned about jobs lost to illegal immigrants. In the meantime, companies ranging from tech firms to real estate finance companies bemoan the lack of qualified workers. Development projects in high supply growth MSAs such as Denver stall because of labor shortages. Demographers point to immigrant groups as the source of household formation and favorable trends in population growth that will benefit the U.S. relative to geographies with aging populations like the EU and Japan.

New immigrants tend to rent, boosting demand for multifamily housing, especially in gateway cities.  Recent surveys suggest that immigrant populations aspire to own homes and to move relatively freely from cities to suburbs and back in the search for employment. Labor mobility and homeownership rates will be constrained by limiting immigration. Industries like tech that demand highly skilled workers may be forced to innovate and substitute capital for labor if they cannot fill vacancies by recruiting foreign workers – constraining job growth. Longer term, if the entry of immigrant populations that tend to have larger households is curtailed, there will be a limit on the so-called demographic dividend for economic growth, with less of a labor force to support an aging population.

10. Climate Change
In January 2017, the National Oceanic and Atmospheric Administration (NOAA) released a new report based on the most up to date scientific evidence on sea level rise that more than doubles the 2013 forecasts of potential sea level rise by 2100 from 2.2 to 4 feet to 6.6 to 8.6 feet.  Sea level rise is caused by both the thermal expansion of the oceans—aswater warms up, it expands—and the melting of glaciers and ice sheets.  These dramatic rises were due largely to new research on the role of the Antarctic in sea rises as well as improved forecast models.  The Atlantic (Virginia Coast North) and western Gulf of Mexico Coasts’ sea rise is projected to be greater than the global average by .3 to .5 meters by 2100.  Alaska and the Pacific Northwest are projected to be 0.1 to 1 meter lower.

While a potential rise of sea level by 6.6 to 8.6 feet by 2100 may seem far in the future, NOAA also estimates that annual frequencies of disruptive and damaging flooding would increase 25-fold with only a 14-inch increase inlocal sea level rise.  Major cities such as Miami, New York, New Orleans, Tampa and Boston are projected to have the most costly problems, with South Florida and most coastal areas all exposed to differing levels of sea rise risk and cost.

The implications of potential sea level rise and related flooding on real estate values is positioned to explode due to dramatic increases in the volume and accessibility of information on the consequences of sea rise. Employers and commercial real estate investors, thanks to hurricanes Katrina and Sandy, can now access municipal and state reports that detail potential risks of sea rise and efforts to mitigate such risks.  Residential and commercial buyers, sellers, brokers, and appraisers can now freely access flood maps and sea rise forecasts that provide detailed assessments of the population, buildings, infrastructure and land that are threatened by rising sea levels.    Websites such as Surging Seas Risk Finder even enable individuals to map potential sea rise and flooding risks of their properties and communities at different points in time and under different sea level assumptions.

Value implications extend well beyond those properties that might be directly affected by flooding.  For example, what if you live or work on a hill, but the access roads and key services you require flood?  Values of all properties will be affected if airports, transportation infrastructure, and other community amenities are negatively impacted.   Commercial properties and local economies in coastal regions will suffer if tenants concerned about community resilience or related tax consequences go elsewhere.

Residential properties are particularly vulnerable to even the potential for value declines due to increased flooding risk because they represent a significant proportion of the retirement nest eggs of many Americans.  Insurance to address such risk is either too expensive or not available in most cases.  For people who are counting on the equity from their home for retirement when they sell in 20 years, few will be willing to roll the dice that sea level rise will not impact value — and many are likely to sell before value declines are fully realized.

 

Categories Economy, Narrative, Office Market

1-Minute Phoenix Metro Office Update: Q3 2017

The Metro Phoenix office market continued on its eight-year positive course, albeit at a slower pace, for the 3rd quarter of 2017. As any athlete will tell you, a win is a win and all the [market] players will take it.  The 216,037 SF of office space absorbed fell short of expectations, however, some large leases were signed in Q3 and tenant activity is strong as we close out the year. 

Despite a seemingly high 19.6% vacancy across the entire market, sustained confidence from developers has 2.1 million SF of new space under construction. Note that only 31% of that figure has been built at the request of users.  The rest is speculative development in high-performing projects or submarkets.

Below is the link to our Lee & Associates Arizona 3rd Quarter 2017 Office Report and as usual, I’ve included my top takeaways, but expanded them to 5.

1. Big Deals Return – 3 of the top 5 leases signed were 130,000 SF or larger. Hopefully this trend continues. The biggest deal, Union Bank, adds 173,000 SF of net new jobs to the Greater Phoenix market. 

2.  Speculative Development – I believe this is prevalent even in a market with 19.6% vacancy, because companies continue to value new real estate as a great recruiting/retention tool.

3. Sublease Space is Significant – For the first time in years, sublease space is making a comeback.  Some of it has been caused by contraction (e.g. University of Phoenix). But State Farm and many other companies have sublet space due to growth, consolidations and the desire for newer buildings. In total, there is now 2.5 million SF of sublease space available in Greater Phoenix. This is concerning for landlords but an opportunity for tenants.

4. Amenities Will Cost You – The highest average rental rates (over $30/SF/YR) can be found in Downtown, Scottsdale South and the Camelback Corridor; home of some of the highest concentration of restaurants and shopping in the Valley.

5. Chandler Makes a Comeback – Previously quiet over the past couple years, Chandler now leads all other submarkets in net absorption with 538,000 SF, year to date.

Please call me if I can help you with your office lease or a building you own.

Andrew
602.954.3762
acheney@leearizona.com

P.S. This week on The Bachelor-NAIOP Edition, Season 2, the guys test their tennis skills on a group date. Nothing like a little competition to reveal who’s there for the right reasons.

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Click Here to Read the Full Report

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Categories Economy, Narrative

Spending Trends in America

One of my favorite movie quotes is from Jerry Maguire – “Show me the money!” And that’s exactly what the below chart does. This very informative chart shows spending trends over the past 75 years in America.

Some key points for me:
 
— Education spending is trending up. Not sure if this is Americans valuing education or just that the cost has risen. As with all the technology advancements, this is a budget item that should be going up for most Americans. Keeping abreast of how technology is changing your business, employees, and the market is more critical today than ever before. 

— Housing continues to be the largest portion of spending. AND the amount we spend on housing costs is growing every period. Urbanization of our population worldwide and here in the US is a massive trend. (Click here to read my previous narrative on this topic.)

— Food costs have declined as food becomes cheaper and more accessible. (Click here to read another narrative on this topic.)  

On a personal note, I am dismayed at the decline in spending on reading.  In my household, I always say, “There is no budget for books.”

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Craig
602.954.3762
ccoppola@leearizona.com

P.S. It’s time to find out who will receive a coveted rose and who will be sent home. Will your favorite tenant make the cut? Watch this week’s episode of The Bachelor – NAIOP Edition to find out.


Click here to read the full article.
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Categories Economy, Narrative, Office Market

2-Minute Phoenix Metro Office Update: Q2 2017

The second quarter was not quite as busy as the first, but there is still good news as our market slowly (painfully slow) continues to improve.  Vacancy held steady at 18.8% despite new construction, and we continued our streak of continuous positive net absorption (job growth).  We haven’t had negative net absorption since 2009.

The pace of net absorption slowed by approximately 500,000 SF in the second quarter, which is the amount of space State Farm absorbed in the final phase of its move to Marina Heights, last quarter.  We now stand at 1.4 million SF of office space absorbed at the mid-year mark.  We will need to absorb another 1.1 million SF in the second half of the year to meet our 25-year average.    

At the street level, my team’s transaction volume remains healthy and I anticipate Q3 will be noticeably better than Q2.  

Below is the link to our Lee & Associates Arizona 2nd Quarter 2017 Office Report and as usual,  here are my top 4 takeaways:  

1.  Downtown Action – Two of the top five leases occurred at the intersection of Central and Washington.  They symbolize a lot of the action and investment going on in our CBD, which helps the entire Metro market look good. Quicken Loans moved from North Scottsdale (the hottest submarket last cycle) into Downtown. Why? The buzz of a vibrant downtown.

2.  Sublease Space – There is 1.9 million SF of sublease space across the entire market.  Not all of it may be great space or have a significant amount of term left; but it means interesting opportunities for tenants and concern for landlords in certain areas. This is a new cycle trend as we have not seen 2 million feet of sublease in a long time.  

3. Lease Rates – Overall across the market, lease rates continue to grow (currently, they average $24.67/SF), but have still have not hit pre-recession levels ($26.55/SF).  Note, this is an average because rates have spiked to nearly $40/SF in a few key micro-markets.

4.  Recovery – Our recovery has come a long way this cycle, and we’ve done it without relying heavily on real estate related companies, like Metro Phoenix has done since there was an office market.  This means our market is increasingly becoming healthier and more diverse. Slower growth but great diversity bodes well for sustained momentum and a smoother ride as the inevitable down cycle comes.   

Need help with your lease or your building? Call or email me anytime.

AC for VR

602.954.3769

acheney@leearizona.com

 


Click Here to Read the Full Report

 

Q2 2017 Office Report

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Categories Economy, Narrative, Office Market

5 Frequently Asked CRE Questions

estate are simple. A tenant needs office space. An owner needs to lease their space to a tenant. But once you get into the details of the transaction, things become complicated really fast.

A good amount of my time working with clients is spent answering their questions. I even wrote 2 books on the subject (How to Win in Commercial Real Estate Investing and The Art of Commercial Real Estate Leasing). Allen Buchanan, one of our company’s thought leaders, is a true pro, and he put together the below article for the Orange County Register addressing the 5 most common commercial real estate questions. 

Here are the top three questions and my answers for the Metro Phoenix office market, which is a bit different from Allen’s market in Southern California:

– How do commercial agents get paid? 
The property owner pays us. Almost all properties are “listed” and the owner is already paying a fee.  Tenant Advocates share in that fee.

– How long have you done this and what changes have you witnessed?  
Like Allen, I have been doing this since 1984 and was one of the Founding Principals of Lee & Associates Arizona in 1991.  There have been huge changes in the business (consolidation, national accounts, technology, etc.) but, as I explain in my book that I co-wrote with our Founder Bill Lee, Chasing Excellence, one thing never changes: relationships.

– How is the market?  
We are in Phoenix and the market has been a long, slow climb out of the Great Recession.  We have several markets (Tempe and Scottsdale) that are on fire because of the tech boom, and other markets that are still over 20% vacant.  Now is the time to have a real pro on your team.

We are here to answer questions, and make your life easier one transaction, one client at a time.
Craig
602.954.3762
ccoppola@leearizona.com


 

5 Frequently Asked Commercial Real Estate Questions

By Allen Buchanan
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January 21, 2017

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I’m often asked questions as a commercial real estate professional. For this week’s column, I considered five of the most commonly asked questions.

Part of my research involved polling colleagues. I believe the questions and the responses are interesting. I will handle these a la David Letterman (remember him?) by discussing in order of least to most relevant.

Question number five: Can I make changes to the space, and if so, who pays for it?

Answer: Generally and it depends.

Changes to a building – adding additional office, a power upgrade, sprinkler retrofit, paint and carpet, moving walls, installing racks, distributing power, etc., can generally be accomplished subject to ownership and governmental approval with the proper permitting and code construction.

Changes to the square footage (for example, adding a structural mezzanine), changes to the common area, fencing required parking spaces, creating windows in bearing walls are not so easy.

Changes are typically paid for in one of three ways: the owner pays for all of the cost and concedes the cost (rare); the occupant pays for all of the cost (even rarer); or some combination of the two. This combination could be an owner paying for the refurbishment of the space – paint, carpet, and cleanup – and conceding the cost and paying for the cost of a sprinkler retrofit and amortizing the cost over the term of the lease.

The “acid test” of who pays depends upon the owner’s ability to pay, the owner’s motivation, the general or specific nature of the improvements (think future marketability) and the market (is the competition delivering space to the market completely refurbished). Sometimes an owner will be willing to compensate a tenant in the form of free or half rent to offset the cost of changes.

Question number four: How do commercial agents get paid?

Answer: The property owner pays us.

A common misconception is the agent’s commission adds to the purchase price or lease rate. The reality is that an engaged professional can achieve a much higher purchase price than the typical owner because of market knowledge and experience. On the occupant side, an experienced professional can negotiate a better lease rate and concession package because of our knowledge of comparables, availabilities, motivation and our expertise. The net result is a better deal for both parties.

Question number three: How long have you done this and what changes have you witnessed?

Answer: Since 1984. Numerous!

Real estate content (comps, avails, absorption, current pricing) is the same, but the method of delivery is different. Who would have foreseen in 1984 that I would be blogging and forwarding location advice electronically in 2017, before fax machines and the world wide web were invented. Or, that we could survey inventory of available buildings – in our car or at the beach – and send a list with images to our clients with the click of a button. Or, that we could send a video, in real time, of the property. Unbelievable!

Question number two: How much is my building worth?

Answer: That depends on a number of factors.

We consider the market – whether it’s trending up or down, the comparables and availabilities. If the market is up, chances are your building is worth more than the comps suggest. If the market is down, you might be best served to price lower than the recent comps and preempt a long marketing cycle.

Marketing time also plays a role. How long can you afford to market the building? A fire sale motivation will cause the building to be worth less. Does the building have special amenities such as excess or surplus land, excess power, fenced yard, freezer/cooler space, special AQMD permits, etc. For the right buyer or tenant, these amenities can add to the price.

Question number one: How is the market?

Answer: Weird.

In Southern California, the market has sufficiently rebounded to cause shortages in certain product – especially manufacturing and distribution space. We are seeing huge price appreciation as well. The occupant’s mindset is that we are still in 2009 and the opposite is true. Our market is healthier than ever! Another thing that has changed dramatically is the amount of regulatory approvals necessary to make a move. A recent 20,000 square foot transaction was reviewed by seven governmental agencies before approval could be achieved. Wow!

Did I leave any out?

Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714.564.7104 or abuchanan@lee-associates.com. His website is www.allencbuchanan.com

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Categories Economy, Narrative

4 in the Top 20!

The good news keeps coming. Metro Phoenix just landed 4 cities in the top 20 best US cities for finding a job in 2017.  Arizona is open for business.  If you are looking to relocate, or know someone who is, there is no better area than the Valley of the Sun.
 
Here are a couple other wins:
– Of those 4 Arizona cities, 3 are in the top 10.
– The number 1 overall city in the country for job finding is…………Scottsdale, AZ.
 
We love Arizona and so do employers.  Last year our team relocated five companies into Metro Phoenix.  If you are thinking of Arizona, call me first.
 
Rolling in Arizona,

Craig
602.954.3762
ccoppola@leearizona.com


The 20 best US cities for finding a job in 2017

By Rachel Gillett
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Jan 5, 2017

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“New year, new city?” If you’re in the market for a fresh start and a new job, you may want to consider adopting this motto.

But not just any new city will do.

As it turns out, places like Miami and Salt Lake City are better for job seekers than New York City and Los Angeles right now, according to personal-finance site WalletHub.

To narrow down the 20 best cities for finding a job in 2017, WalletHub compared the 150 most populous US cities based on 23 metrics (like job opportunities, employment growth, monthly median salary, and safety) across two key dimensions (job market and socioeconomic environment, with a greater emphasis on the former).

To read more about the study’s methodology, check out the full report here.

20. San Jose, California
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No. of job opportunities rank (out of 150): 72
Employment growth: 2.19%
Median annual household income: $53,915
While San Jose has some of the least affordable housing, its younger residents have some of the lowest annual transportation costs and highest monthly median starting salaries to make up for it.
 
19. Overland Park, Kansas
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No. of job opportunities rank (out of 150): 25
Employment growth: 0.14%
Median annual household income: $77,006
With a low number of employed residents living below the poverty line and a high number of them having health benefits, Overland Park ranks No. 19 overall.

18. Gilbert, Arizona
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No. of job opportunities rank (out of 150): 83
Employment growth: -3.30%
Median annual household income: $55,211
Gilbert ranks highly for safety (No. 1), employee benefits (No. 3), and housing affordability (No.5).
 
17. Garland, Texas
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No. of job opportunities rank (out of 150): 80
Employment growth: 3.52%
Median annual household income: $52,022
Almost half of the persons with disabilities in Garland are employed, earning it the No. 3 spot for “disability friendliness of employers.” The Texas city is also the eighth best in terms of housing affordability and median annual household income.

16. Minneapolis, Minnesota
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No. of job opportunities rank (out of 150): 10
Employment growth: 1.08%
Median annual household income: $47,579
Minneapolis will appeal to both the single job-seeker and the job-seeker with family ties, ranking No. 17 for both. The Minnesota city also boasts the eighth-lowest unemployment rate.

15. Fort Wayne, Indiana
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No. of job opportunities rank (out of 150): 59
Employment growth: 5.27%
Median annual household income: $50,782
Fort Wayne’s bright spots: housing affordability and employment growth. It ranked No. 1 and No. 3 in those categories, respectively.

14. Fort Lauderdale, Florida
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No. of job opportunities rank (out of 150): 12
Employment growth: -1.16%
Median annual household income: $44,464
Despite being in the red in terms of employment growth, this coastal city earns its spot on the list with its access to internships and bright economic outlook, which places it at No. 2 in the latter category.
 

13. Honolulu, Hawaii
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No. of job opportunities rank (out of 150): 65
Employment growth: 0.21%
Median annual household income: $32,647
The capital of Hawaii earns the No. 1 spot for employment outlook, based on the Manpower Group Outlook survey, which asks 11,000 American hiring managers about their hiring plans for the quarter. Most of its employed inhabitants have private health insurance, earning it a No. 5 spot for benefits.

12. Miami, Florida
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No. of job opportunities rank (out of 150): 13
Employment growth: 0.37%
Median annual household income: $27,650
What Miami lacks in average earnings it makes up for with access to internships and employment outlook, earning No. 1 and No. 2 spots in these respective categories.

11. Peoria, Illinois
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No. of job opportunities rank (out of 150): 92
Employment growth: 3.50%
Median annual income: $63,376
With Peoria’s No. 7 ranking for median annual household income, it’s easy to understand why the Illinois city also sees the seventh-smallest percentage of employed residents who live under the poverty line (4.3%).

10. Raleigh, North Carolina
unnamed-4 2
No. of job opportunities rank (out of 150): 34
Employment growth: 0.92%
Median annual household income: $61,213
Raleigh has the second-best employment outlook and the eleventh-best job security and median annual household income.

9. Tempe, Arizona
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No. of job opportunities rank (out of 150): 32
Employment growth: 2.84%
Median annual household income: $51,107
Coming in at No. 7 for workplace accessibility, Tempe offers a number of jobs accessible by a 30-minute transit ride. It’s unsurprising, then, that its dwellers spend on average only eight hours a day working and commuting, earning it a No. 10 spot in the “Working and Commuting Time” category.

8. Salt Lake City, Utah
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No. of job opportunities rank (out of 150): 2
Employment growth: 2.89%
Median annual household income: $49,007
Ranking No. 2 for job opportunities and No. 7 for industry variety and low unemployment, Salt Lake City is a great place for today’s job-seekers, according to WalletHub.

7. Chandler, Arizona
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No. of job opportunities rank (out of 150): 66
Employment growth: -0.02%
Median annual household income: $75,803
Chandler ranks fifth in the “median annual household income” and has near the lowest number of employed residents living under the poverty line.

6. Rancho Cucamonga, California
unnamed-8
No. of job opportunities rank (out of 150): 89
Employment growth: 5.76%
Median annual household income: $57,758
Despite its middling amount of job opportunities, this “sandy place” has the greatest annual job growth and a very low underemployment rate.

5. San Francisco, California
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No. of job opportunities rank (out of 150): 19
Employment growth: 2.43%
Median annual household income: $46,085
San Francisco may not offer the most affordable housing or the shortest workday, but it does rank No. 1 for low transportation costs and No. 7 for singles on WalletHub.

4. Sioux Falls, South Dakota
unnamed-10
No. of job opportunities rank (out of 150): 27
Employment growth: 1.58%
Median annual household income: $56,143
Sioux Falls has the lowest unemployment rate among all cities analyzed by WalletHub and is the fourth-best place for families, helping it land the No. 4 spot overall.

3. Orlando, Florida
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No. of job opportunities rank (out of 150): 1
Employment growth: -1.27%
Median annual household income: $43,094
With plenty of singles, access to internships, and the most job opportunities, Orlando is a great place for young professionals to search for jobs.

2. Plano, Texas
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No. of job opportunities rank (out of 150): 29
Employment growth: -0.11%
Median annual household income: $83,128
Plano may be in the red in terms of employment growth, but this Texas town ranks No. 1 for the number of full-time employees compared to part-time, No. 3 for disability-friendliness of employers as well as for housing affordability, and No. 3 for families.

1. Scottsdale, Arizona
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No. of job opportunities rank (out of 150): 22
Employment growth: 3.29%
Median annual household income: $76,421
Boasting some of the highest median annual household income numbers and best employee benefits, Scottsdale comes in at No. 1, according to WalletHub. Its access to internships and low transportation costs also helped this Arizona city land the top spot.

 

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Categories Economy, Narrative

Demonetized Cost of Living

Everyone talks about the negatives that happen in our lives. But some of the most incredible transformations are going on right in front of our eyes as well. A few months ago, I shared with you Dr. Peter Diamandis’ email about how the world is getting better (Click here to read that post). Today’s topic also comes from Diamandis, and addresses the demonetization of the cost of living.  

Below are the top 7 ways we spend our money and how the cost of these is dropping precipitously. This includes:

  1. Transportation 
  2. Food 
  3. Healthcare 
  4. Housing 
  5. Energy 
  6. Education 
  7. Entertainment
Read on to see how cheap living will be in the coming years. Curious how this will affect real estate? Give me a call. 
Craig
602.954.3762
ccoppola@leearizona.com

P.S.- Why does Michael Kosta need toilet paper? Click here to watch the video and learn the answer. 

Why C2 Pt 2
(Having trouble viewing the video? Click here)

Email from Dr. Peter Diamandis

People are concerned about how AI and robotics are taking jobs and destroying livelihoods… reducing our earning capacity, and subsequently destroying the economy.

In anticipation, countries like Canada, India and Finland are running experiments to pilot the idea of “universal basic income” – the unconditional provision of a regular sum of money from the government to support livelihood independent of employment.

But what people aren’t talking about, and what’s getting my attention, is a forthcoming rapid demonetization of the cost of living.

Meaning — it’s getting cheaper and cheaper to meet our basic needs.

Powered by developments in exponential technologies, the cost of housing, transportation, food, health care, entertainment, clothing, education and so on will fall, eventually approaching, believe it or not, zero.

In this blog, I’ll explore how people spend their money now and how “technological socialism” (i.e. having our lives taken care of by technology) can demonetize living.

As an entrepreneur, CEO or leader, understanding this trend and implication is important… it will change the way we live, work, and play in the years ahead.

How We Spend Our Money Today

Spending habits around the world tell a pretty consistent story – we tend to spend money on many of the same basic products and services.

Take a look at how consumers spent their money in three large economies: The United States, China, and India.

In the U.S., in 2011, 33% of the average American’s income was spent on Housing, followed by 16% spent on Transportation, 12% spent on Food, 6% on Healthcare, and 5% on Entertainment.

In other words, more than 75% of Americans’ expenditures come from Housing, Transportation, Food, Personal Insurance, and Health.

In China, per a recent Goldman Sachs Investment Research report, there is a similar breakdown — Food, Home, Mobility, and Well-Being make up the majority of the expenditures.

Interestingly, in China, consumers care significantly more about looking good and eating better (and less about having more fun) than in the U.S. – nearly half of consumer income goes to clothes and food.

In India, with a population of 1.2 billion people, expenditures on Food, Transportation, and Miscellaneous Goods and Services are most prominent.

Rent/Housing and Healthcare represent a smaller portion of expenditures.

These differences likely represent cultural differences in each of the three very different countries – but overall, you see that the majority of expenditures are in these top 7 categories:

  1. Transportation
  2. Food
  3. Healthcare
  4. Housing
  5. Energy
  6. Education
  7. Entertainment

Now, imagine what would happen if the cost of these items plummeted.

Here’s how…

Rapid Demonetization – What It Means

To me, “demonetization” means the ability of technology to take a product or service that was previously expensive and making it substantially cheaper, or potentially free (in the extreme boundary condition). It means removing money from the equation.

Consider Photography: In the Kodak years, photography was expensive. You paid for the camera, for the film, for developing the film, and so on. Today, during the Megapixel era, the camera is free in your phone, no film, no developing. Completely demonetized.

Consider Information/Research: In years past, collecting obscure data was hard, expensive in time if you did it yourself, or expensive in money if you hired researchers. Today, during the Google Era, it’s free and the quality is 1000x better. Access to information, data and research is fully demonetized.

Consider Live Video or Phone calls: Demonetized by Skype, Google Hangouts, the list goes on:

  • Craigslist demonetized classifieds
  • iTunes demonetized the music industry
  • Uber demonetized transportation
  • AirBnb demonetized hotels
  • Amazon demonetized bookstores

Demonetizing ~$1M Worth of Stuff We Take for Granted

In the back of my book Abundance (Page 289 of the recent edition), I provide a chart showing how we’ve demonetized $900,000 worth of products and services that you might have purchased between 1969 and 1989.

900,000 worth of applications in a smart phone today

People with a smartphone today can access tools that would have cost thousands a few decades ago.

Twenty years ago, most well-off U.S. citizens owned a camera, a videocamera, a CD player, a stereo, a video game console, a cellphone, a watch, an alarm clock, a set of encyclopedias, a world atlas, a Thomas guide, and a whole bunch of other assets that easily add up to more than $900,000.

Today, all of these things are free on your smartphone.

Strange that we don’t value these things when they become free. We just expect them.

So now, let’s look at the top seven areas mentioned above where people globally are spending their cash today, and how these things are likely to demonetize over the next decade or two.

(1) Transportation:

The automotive market (a trillion dollars) is being demonetized by startups like Uber. But this is just the beginning.

When Uber rolls out fully autonomous services, your cost of transportation will plummet.

Think about all of the related costs that disappear: auto insurance, auto repairs, parking, fuel, parking tickets… Your overall cost of “getting around” will be 5 to 10 times cheaper when compared to owning a car.

This is the future of “car as a service.”

Ultimately, the poorest people on Earth will be chauffeured around.

(2) Food:

As I noted in Abundance, the cost of food has dropped thirteenfold over the past century. That reduction will continue.

$ <ol>f <p><em>r capita disposable income spent <ol>n food in the United States

As noted in the chart above, the cost of food at home has dropped by >50%.

Additional gains will be made as we learn to efficiently produce foods locally through vertical farming (note that 70% of food’s final retail price comes from transportation, storage and handling).

Also, as we make genetic and biological advances, we will learn how to increase yield per square meter.

(3) Healthcare:

Healthcare can be roughly split into four major categories: (i) diagnostics, (ii) intervention/surgery, (iii) chronic care and (iv) medicines.

(i) Diagnostics: AI has already demonstrated the ability to diagnose cancer patients better than the best doctors, image and diagnose pathology, look at genomics data and draw conclusions, and/or sort through gigabytes of phenotypic data… all for the cost of electricity.

(ii) Intervention/Surgery: In the near future, the best surgeons in the world will be robots, and they’ll be able to move with precision and image a surgical field in high magnification. Each robotic surgeon can call upon the data from millions of previous robotic surgeries, outperforming the most experienced human counterpart. Again, with the cost asymptotically approaching zero.

(iii) Chronic/Eldercare: Taking care of the aging of chronically ill will again be done most efficiently through Robots.

(iv) Medicines: Medicines will be discovered and manufactured more efficiently by AI’s, and perhaps in the near future, be compounded at home with the aid of a 3D printing machine that assembles your perfect medicines based on the needs and blood chemistries in that very moment.

It’s also worth noting the price of genomics sequencing is plummeting (as you’ll see below, five times the rate of Moore’s Law). Accurate sequencing should allow us to predict which diseases you’re likely to develop, and which drugs are of highest use to treat you.

The plummeting cost to sequence the human genome (Source: NHGRI)

The plummeting cost to sequence the human genome (Source: NHGRI)

(4) Housing:

Think about what drives high housing costs. Why does a single-family apartment in Manhattan cost $10 million, while the same square footage on the outskirts of St. Louis can be purchased for $100,000?

Location. Location. Location. People flock to high-density, desired areas, near the jobs and the entertainment. This market demand drives up the price.

Housing will demonetize for two reasons: The first reason housing will demonetize is because of two key technologies which make the proximity of your home to your job irrelevant, meaning you can live anywhere, specifically where the real estate is cheap:

(1) Autonomous Cars: If your commute time can become time to read, relax, sleep, watch a movie, have a meeting… Does it matter if your commute is 90 minutes?

(2) Virtual Reality: What happens when your workplace is actually a virtual office where your coworkers are avatars? When you no longer need to commute at all. You wake up, plug into your virtual workspace, and telecommute from the farm or from the island of Lesvos.

The second technology drivers are the impact of Robotics and 3D Printing, which will demonetize the cost of building structures.

A number of startups are now exploring how 3D printed structures and buildings can dramatically reduce the cost of construction and the amount of time it takes to build a building.

For example, a company out of China, Winsun, is 3D printing entire apartment buildings (see picture below):

6-story building 3D printed by Winsun

6-story building 3D printed by Winsun

(5) Energy:

Five thousand times more energy hits the surface of the Earth from the Sun in an hour than all of humanity uses in a year. Solar is abundant worldwide. Better yet, the poorest countries on Earth are the sunniest.

Today, the cost of Solar has dropped to ~$0.03 kWh. The cost of Solar will continue to demonetize through further material science advances (e.g. perovskite) that increase efficiencies.

(6) Education:

Education has already been demonetized in many respects, as most of the information you’d learn in school is available online, for free.

Coursera, Khan Academy, and schools like Harvard, MIT and Stanford have thousands of hours of high-quality instruction online, available to anyone on the planet with an Internet connection.

But this is just the beginning. Soon the best professors in the world will be an Artificial Intelligence, an AI able to know the exact abilities, needs, desires and knowledge of a student and teach them exactly what they need in the best fashion at the perfect rate.

Accordingly, the child of a billionaire or the child of a pauper will have access to the same (best) education delivered by such an AI, effectively for free.

(7) Entertainment:

Entertainment (video and gaming) historically required significant purchases of equipment and services.

Today, with the advent of music streaming services, YouTube, Netflix and the iPhone App Store, we’re seeing an explosion of available selections at the same time that the universe of options rapidly demonetizes.

YouTube has over a billion users — almost one-third of all people on the Internet — and every day, people watch hundreds of millions of hours on YouTube and generate billions of views.

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Categories Economy, Narrative, Office Market

CRE Crowdfunding

Crowdfunding Commercial Real Estate acquisitions is all the rage. However, like everything, there are opportunities and liabilities in placing your investment dollars in a crowdfunded deal.  

Below are two different articles with highlights. But first, a quick summary:

Liabilities:

  • Investors lack the industry knowledge and experience needed for real estate investments
  • Too many uncommitted investors
  • High legal fees
  • High platform fees

Opportunities:

  • Allows for smaller amounts of capital to buy a piece of an investment
  • Gives real estate entrepreneurs another avenue to raise capital other than highly-regulated banks
  • Investors retain tax benefits sooner
  • Provides access to a more diverse portfolio

 

If you aren’t sure if crowdfunding is right for you, give us a call.

 

Craig
602.954.3762
P.S.- Click here to read an article about CRE crowdfunding being used right now for this unique development in Portland, Oregon.
13-DUMBBELL-1-master768

Challenges, Pitfalls and Problems with Crowdfunding Real EstateBy Jordan Wirsz

CRE-Tech-Logo-for-News-and-Press
06/14/2016

It seems only a few short years ago, the “holy grail” of raising capital for developers and private issuers opened up. The term “crowdfunding” saw headlines all over the United States, and the sense of optimism that capital raisers had was at an all-time high. We even saw people crowdfunding to start crowdfunding companies. Crowdfunding conferences emerged all around the country, and regulators looked on in horror as every Tom, Dick and Harry had some new gimmick to fund through crowdfunding.

But the reality of crowdfunding is very different than the outward appearance of a sleek, easy and quick way to get deals done. From the outside looking in, a capital raiser would see crowdfunding as an opportunity to put their project onto the investor’s equivalent of “eBay” where people just see the offering, click buy, and all of a sudden your offering is full. However, the realities are a stark contrast to what most people, especially real estate developers and issuers, perceive.

Real estate technology is evolving rapidly, and not the least of which is how developers and investors raise capital. Crowdfunding, the natural evolution of real estate capital sources, has seen an incredible number of platforms (aka websites) rise up, some more successful than others. Competition amongst them is high, and although their business models vary, the net result is a relatively common core group of users that see all of the same deals or at least types of deals.

There are two primary types of crowdfunding real estate investors:

The individual: There are individual investors who like to log-in to online platforms and make their own assessments and judgements of which deals they want to invest in. Unfortunately, these investors might often choose to invest in the best sales-pitch, not necessarily the best deals. From the issuer’s perspective, these investors carry a lot of risk. They are relatively low in experience, and the potential for litigation is high. Additionally, most of these individual investors believe in diversification as a fail-safe to one deal going bad… Which naturally sounds good, but ultimately proves to be a failing strategy when compared to just doing “good deals.” Unfortunately many investors who participate in real estate investments through crowdfunding are of modest means, and no matter how many disclosures they sign, the optimism outweighs the risk in their minds. This is why I have made it a point to only work with accredited investors who have the means and experience in accumulating wealth to understand the risks.

The institution: More and more, institutions are looking at “crowdfunding” type opportunities to diversify their holdings. When an emerging manager, or perhaps even a family office decides to diversify into real estate, they might consider crowdfunding as a means to enter the asset class. Institutions and institutional type investors like simplicity. Unlike the reality that all developers and true hands-on real estate investors understand, institutional folks don’t understand how “hands on” real estate really is. So, they seek a “hands off” approach by finding other people to do the hard work through crowdfunding, or alternatively through publically traded or even private REITs. Institutional types like the “push of a button” buy and sell process. Even to individual investors get romantic about the idea of sitting at a computer screen, clicking a mouse, and getting a good return on their investment. After all, real estate investing is a “sexy” concept.

Trust me, there is nothing “cheap” about raising capital from a crowdfunding platform.

Dealing with the two different investor types can be challenging. On one hand, the individual investors might buy into an investment with less due diligence than an institutional investor would, but the dollar amounts are usually small. On the other hand, institutional investors might bet bigger, but they’ll scrutinize every offering to a high standard, and I’ve found, they often ask the wrong questions and focus on the wrong things. Albeit, they have their own way of doing things.

The real challenge with crowdfunding real estate isn’t necessarily the investors, but more so, the issuers…i.e. the developers or real estate investors who are trying to raise money from outside sources that they don’t understand. Real estate capital raisers are more often than not, self-promoting real estate developers and investors. They are not in the securities business, and they often have little understanding of the implications of being in the securities business. As an issuer raising capital from other investors, there is a complex standard of doing business that not only protects the investors, but protects the capital raiser from extenuating and undue liability, both regulatory and litigation. Believe it or not, the most problems any capital raiser will have is not with the investor who invests $1 million, but the investor who invested $5,000. The lack of sophistication and understanding, in addition to the lack of experience in risk management and risk knowledge, is a dangerous combination.

The other side of the real estate business, when using outside capital, is the securities business, which most real estate investors/crowdfunding issuers don’t have any experience in at all. I liken that scenario to a baggage handler at a local airport, climbing into the co-pilot seat of a Boeing 737. Just because you work in real estate, with investors, does NOT mean that you have a good understanding of the rules and regulations around being a securities issuer, nor does it mean that you understand the risks of regulation.

In addition to the challenges and pitfalls discussed above, one very important problem with crowdfunding is the lack of commitment that any crowdfunding platform will give you to “fill the offering.” I have seen countless examples of investors and developers trying to raise money in crowdfunding sites, only to achieve a minimal percentage of what they actually need to do the deal. So you raise half your funds… Then what? You can’t do half of a real estate deal because you only have half the capital needed. And besides, UNDERfunding yourself is one of the biggest mistakes anyone can make. So, the choice becomes either find another source of money, or don’t do the deal. Frustrating, but no crowdfunding platform will guarantee that you will fill your offering.

Few investors/developers who consider crowdfunding realize how expensive crowdfunding can be, and as such, fail to pro forma the true costs and risks associated with even attempting to raise the funds. Many crowdfunding websites will charge subscribers to look at deals… But they will also charge the issuers who are trying to raise capital. And those fees aren’t always small… It can cost thousands, even tens of thousands, to list your deal on one or more platforms. Next, before you put your deal out to raise capital, you’ll need all the proper disclosure documents. Oh how many times I’ve heard, “Oh Jordan, don’t worry about that – I found a template online!” That is usually the second or third signal to “run” away from that deal. There are no online templates which are sufficient to use for disclosure documents and subscription documents to investors. A lawyer, and an experienced securities lawyer at that, should always be used in the creation of disclosure documents and offering documents. That cost can range from $5,000 to $50,000 very easily, depending on the size and complexity of any given deal.

The next area of cost, is usually a percentage that the platform charges to raise the capital. For example, if you want to raise $500,000, the platform might charge a fee of 5% to 10% of that amount. Not only does that dilute the investor (another disclosure by the way), but it also dilutes the return… And as such, the developer’s profit.

Trust me, there is nothing “cheap” about raising capital from a crowdfunding platform. By the time you figure in legal fees, platform fees, and a good split with the investors, crowdfunding often turns a “great deal” into a mediocre deal at best.

There are many ways to raise capital, crowdfunding included. Crowdfunding has worked well for many issuers, developers and real estate investors. However, there are also other, easier, and possibly better ways to skin that cat. Working with fewer, larger investors who you can count on is by far the best way to raise real estate investment capital. Beware of the allure of crowdfunding, while not completely understanding the challenges, pitfalls and problems of this method of raising capital for your real estate projects.

 


 

How Crowdfunding Has Permanently Changed Commercial Real Estate
By Nav Athwal
 
Forbes-logo
 
MAR 21, 2016

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Crowdfunding platforms make it possible for investors to connect with private real estate deals online without running into the obstacles that have traditionally been associated with commercial real estate investing. No longer does it take $50,000 or more to invest in a commercial property. Instead, it’s possible to participate in deals with as little as $5,000. Alas, it isn’t only institutions like the Harvard and Yale Endowments that can capitalize on the benefits of adding commercial real estate to the portfolio.
 
In terms of diversification, crowdfunding is positioned to offer investors a wide range of commercial investment types including office buildings, self-storage units, retail properties, healthcare facilities and multi-family residential properties. These platforms offer both debt and equity investments, which are geographically varied, allowing our investors even more control over their diversification strategy.  Real estate crowdfunding also makes it possible for investors to take advantage of those tax benefits mentioned earlier. Deals are typically structured using a pass-through entity such as an LLC, which allows the value of the various deductions to pass through to investors.
 
But investors aren’t the only ones benefitting from real estate crowdfunding.  It has also emerged as a new way for entrepreneurs and small companies investing in real estate to raise capital more efficiently than what banks and traditional private money sources can offer.  Coming out of the great recession with banks becoming more regulated and credit getting tighter, real estate crowdfunding has filled the gap by connecting real estate entrepreneurs with a new base of investors and capital.
 
However, despite its obvious benefits, crowdfunding for real estate is not without its limitations. For example, most crowdfunding for real estate platforms are limited to Accredited Investors only thus serving only a subset of the general public. Additionally, as is inherent with commercial real estate investing, investments in crowdfunded real estate are illiquid and not freely tradable like stocks. Despite these shortcomings, crowdfunding is the first step towards making commercial real estate accessible to investors that have historically been excluded.  And I’m personally excited to see where it goes from here.

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Categories Economy, Narrative, Office Market

Suburban Office Markets

The current recovery has been anemic, not just economically but in terms of new office construction as well. Long term, the lack of new buildings is good as overbuilding is not a concern. With the emergence of millennials in the work force and live/work/play environments,  suburban office markets have been even slower to recover. As the Central Business District (CBD) submarkets continue to tighten, developers are now looking more and more to the suburbs.
 
–       Housing-bust metros (including Phoenix) still lag from normal pre-recession levels. (However, this is finally changing in Phoenix.)
–       Pent-Up suburban office space development is becoming a hot commodity as speculative development in the suburbs has lagged and CBD rents rise as space becomes scarce.
–       The rent premium a tenant will pay for a brand-new building is substantially higher than current rents. We will see if tenants will pay up for new.
 
Metro Phoenix is an interesting market.  We have Live/Work/Play in several submarkets creating opportunities for tenants to shop the market and really focus in on their needs (employee demographics, access, amenities, etc.).  Let me know if you want to discuss this further.

Craig
602.954.3762

P.S.- Find out who is more aggressive, Craig or Andrew, in this week’s video with Michael Kosta. Click here to watch.

Why C2 Pt 1
(Having trouble viewing the video? Click here)

Office Developers Size Up Suburban Markets for Spec Development

Major CBD Office Markets Still Where Most of the Action Is, but Suburbs are Getting a Second Look Amid Dearth of Large Blocks of Space

By Randyl Drummer
CoStar_logo
 
September 29, 2016

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With construction cranes crowding the downtown skylines in the San Francisco Bay Area, New York City, Seattle and other large CBDs, office developers and investors may do well to branch out into markets and submarkets where competition with other projects isn’t so keen and the barriers to entry aren’t as daunting. “There are many markets out there that are late-recovery plays offering significant rent upside and limited risk from new construction,” said Walter Page, director of research, office, CoStar Portfolio Strategy, during a webinar presentation titled “From the Ground Up: Late-Cycle Development Strategies,” presented with Hans Nordby, managing director of CoStar Portfolio Strategy, and managing consultant Lee Everett. 

Certain downtown and suburban submarkets within former housing-bust metros such as Sacramento, Phoenix, Orange County, the East Bay of San Francisco and even the San Fernando Valley submarket in Los Angeles are still only seeing a fraction of their pre-recession construction levels. Tampa, Atlanta, Austin, Miami, Washington, DC; and Boston continue to lag below historical norms for new supply. 

Leastconstruction

 
While developers haven’t been building at the feverish clip of the previous cycle, the uptick in interest in development among core and value-add funds, plan sponsors and foreign investors, especially from China, has been tangible in the first three quarters of 2016. 

“Never before have we seen such a diversity of our clients interested in either building development or lending on that construction,” Nordby said. 

The long office supply lag in these late-recovering metros could finally bring development opportunities in the submarkets of such secondary markets such as downtown Milwaukee and suburban Tampa, the CoStar analysts said. 

“If you’re looking to build, it may not be as bad a time to start now as you may think,” Nordby said, citing investment sales, rent growth and occupancy growth in many markets which in many cases exceeds their historical averages since 2000. 

Overall U.S. office supply addition has been muted throughout the recovery. Despite pockets of strong building in Silicon Valley, San Francisco, New York, Seattle, Dallas and a few other top markets, total projects under construction currently make up just 1.5% of U.S. office inventory, well below historical trends, with just 36% of metros seeing more new office space entering inventory than their long-term averages. 

In fact, overall office construction, which has remained flat for more than 18 months, now appears to trending down, Nordby said. By comparison, 79% of metros currently have apartment construction levels above their average since 2000. 

Pent-Up Suburban Demand Could Bring Opportunity

At the same time, the share of U.S. office construction projects in downtown districts versus suburbs is picking up significantly, currently at 38% of all office construction. Suburban office development has fallen in recent quarters, now totaling about half the 250 million square feet under construction in the suburbs at its peak in 2000. 

With brisk levels of office construction already underway in the top coastal markets and CBDs, this slowdown in suburb supply may be a window of opportunities for well-informed and savvy developers. 

Suburban markets such as Tampa and West Portland, OR, are looking like an increasingly good bet for investors based on rising occupancy, lower rents, pricing upside and the virtual absence of construction compared with history. 

Suburban office product is also getting more sophisticated based on tenant feedback. Version 2.0 of the suburban office park includes single-tenant office buildings outfitted with larger, more open floorplates and higher parking ratios. For example, a 150,000-square-foot building developed for GoDaddy in Tempe, AZ, has a whopping 6.7 parking ratio for its 1,350 employees, who are occupying fewer square feet per work and enjoying perks such as a yoga room and indoor go-cart track. 

Spec Resurfaces In Suburbs

Investors are taking their next step into speculative development since the recession in markets with a growing shortage of available space for large tenants. For example, in Tampa, Vision Properties — which in February acquired Renaissance Park, a five-building, 573,053-square-foot master-planned suburban corporate office campus north of Tampa International Airport — vowed eight months ago to consider developing an office building on a four-acre vacant site in its new acquisition without a tenant in tow. 

Vision plans to make good on that vow in November, breaking ground on a three-story, 111,600-square-foot building in the master-planned office campus, acquired for $100 million from Liberty Property Trust. Mountain Lakes, NJ-based Vision has already secured site work permit and applied for a building permit on Tuesday. Construction is expected to take just 12 months. 

Many relocating firms are warming up to secondary Sunbelt markets such as Tampa and Charlotte, and expanding in those metros grow attached to the benefits of lower labor, tax and business costs, including Fortune 500 companies such as Johnson & Johnson, Bristol-Myers Squibb and Citigroup, Will Bertolero, vice president of asset management for Vision Properties, tells CoStar. 

“Even tenants within our own park were skeptical and a bit shocked when we decided to go spec,” Bertolero said. 
“With the lack of large contiguous blocks of space in the market with structured parking, right now is the prime time to move forward.” 

Vision has received many inquiries for requirements of between 30,000 to 50,000 square feet and one prospective tenant may even take around 100,000 square feet, the vast majority of the building, Bertolero added. 

CoStar’s Page noted that spec makes a lot of sense in Tampa, a market generally oriented toward smaller tenants where it’s more difficult to reach the 40% or 50% pre-leasing to begin construction as might be required to construction in larger CBDs. 

“The time is right to do this as construction activity is exceptionally low,” Page said. “We are finding that the rent premium a tenant will pay for a brand-new building is higher than most investors realize.” 

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Categories Economy, Narrative, Office Market

Metro Phoenix is Getting Better…Slowly

Steady net absorption (more space being leased due to job growth) continues to chip away at Metro Phoenix’s office vacancy as we head into Q4 2016. This quarter, Phoenix benefitted from medium-sized companies expanding. We hope these companies continue to grow. The metro Phoenix office market is on pace to perform roughly the same as 2015, i.e. just above average.
 
The market experienced 845,000 SF of net absorption in Q3, lowering vacancy down to 18.6%, and closer to equilibrium levels of 15% – 17% (neither a Landlord’s nor a Tenant’s market). What does this really mean?  It means there are hot spots across the Valley, like Tempe and South Scottsdale, where vacancy is in the single digits, and it’s tough to find Class A space for less than $30/SF/YR.  It also means there are areas like Midtown Phoenix and the Superstition Corridor starting to see more leasing activity due to their discounted pricing and large availability of space. Most importantly, it means that Metro Phoenix is doing well.  Local businesses here are growing and out of state companies are relocating here to take advantage of the great resources Arizona offers.
 
Below is a link to our Lee & Associates 3rd Quarter Report and as usual, I’ve included my top takeaways below:
 
1.       The Camelback Road Corridor Comeback- After being negative over the past several quarters, the Corridor finished 2nd in net absorption this past quarter, only behind Tempe. The demand for Class A space with tons of amenities has resulted in the highest average asking rates in Greater Phoenix at $30.14/SF/YR
2.       Spec Construction Doing Well- In addition to the build-to-suit projects, there are eight speculative projects underway. They all have great activity.
3.       Substantial Renovation Construction- In an effort to appeal to today’s tenants, there are four projects totaling 827,000 SF, all undergoing major renovations, all near Tempe and the airport. 

While this quarter saw minimal large (100k SF and bigger) leases executed, there are a number of large users in the market today which will help us finish 2016 with strong momentum. If you have a question on your lease, want to find out how much your building is worth, or just want to talk about the market, please give me a call.

AC for VR

602.954.3769
acheney@leearizona.com

P.S.- This October, Lee & Associates AZ is celebrating our 25th Anniversary. Coppola-Cheney is proud to have been here from the start, and we look forward to what the coming years hold. 

25th Anniversary - Post Card_WEB 2  25th Anniversary - Post Card_WEB2

Click Here to Read the Full Office Market Report 

Q3 Report

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Categories Economy, Narrative, Uncategorized

Who Will Be the Uber of CRE?

Anytime you look to the future, the word disruption always enters the conversation. I spend way more time now looking at companies that are trying to disrupt the brokerage business than I ever did in my entire career. As a 25-year CCIM, I found the below article worth sending out as one of my narratives. Many of these trends apply to other businesses, but are particularly interesting for commercial real estate.  So what are we doing to stay relevant?

—We are hiring the best talent possible.  On our team today, we have brokers with a finance degree & 2 MBA’s, a structural engineer, a construction management degree, and an attorney.

—We have all our brokers continuously growing and learning (all our members now have their CCIM, and two have SIOR’s and CRE).
—We are providing more services and more unique processes than ever.  (Here is a link to our unique process)
Yes, there will be fallout as technology continues to evolve. We will as well.  There is one thing that never gets disrupted: relationships. In my book, Chasing Excellence, written with our Founder, Bill Lee, we have a chapter on this topic. Click here to learn more. 
Call me to start a relationship today.
Craig
602.954.3762
P.S.- How many people can say they are 2nd and 3rd generation AZ natives that donate over 1,000 hours a year to local charities? Coppola-Cheney can. Click here to hear about some of the organizations we work with/donate to.
Serving the Community
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Disruption Ahead!

Who will be the Uber of commercial real estate? 
By Surabhi Sheth
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Feb.16

Every new generation demands and creates new ways of living, working, and doing business. Millennials, who will comprise 70 percent of the workforce by 2030, want to break free of the cubicle, and prefer an open, flexible work culture that allows them to work anywhere, anytime. To meet the needs of this new workforce, companies are leveraging technology developments – cloud computing, mobile, analytics – to create innovative products and services that, in the process, make existing business models obsolete. For instance, startup companies in the shared economy, unheard of just a few years ago, have capitalized on location technologies and transformed the local transportation and hospitality industries in cities worldwide.The commercial real estate sector is ripe for disruption, the same as many other legacy industries. For instance, high-quality Internet has enabled advanced payment systems, the Internet of Things, and geolocation services. Combined with urbanization and changing consumer patterns, these trends have the potential to redefine the commercial real estate demand-supply dynamics and business model, including real estate usage, site location, development, design, valuations, leasing, and financing.

While disruptive trends abound, some are generating more energy than others in the commercial real estate sector. For instance, technology-driven disruption of the brokerage model is forcing brokerage and leasing companies to innovate from the grassroots level. At the same time, three other trends are gaining relevance: the rise of the collaborative economy, demand-supply gap in talent, and changes in the last-mile delivery options of retailers. 

The Cloud Over Brokerage and Leasing

Technology-enabled access to information that was once available to just a few – at a high price – is bringing down barriers between commercial real estate owners and potential tenants, and diluting the role of real estate brokers and leasing representatives.
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New entrants are leveraging cost-effective and real-time availability of property information to offer new service models that further enable this trend. For instance, property listing websites, such as Hubble and 42Floors, now provide services ranging from basic aggregation of leasable space to offering online marketplaces for owners and prospective tenants.

Other companies such as CompStak and DealX are now leveraging the power of crowdsourced lease comparables and offering them for public consumption, along with information such as tenant name, rent, lease duration, and landlord concessions. Real Massive and VTS have even broader platforms, offering property listings and market and other related information to owners, tenants, and brokers. Such online marketplaces are creating data ubiquity and transparency, which is empowering tenants and property investors to make more informed decisions independent of brokers.

Technology is further disrupting the traditional brokerage model. For instance, geospatial technologies help automate several activities related to site analysis, sales, and marketing, as well as provide information that allows more informed location-related decision-making for property owners and tenants. Artificial intelligence is automating tasks that in the past could only be done by humans.

Likewise, online property sites are eliminating the need for the broker-mediated property tour by offering virtual tours. For example, the Brazilian real estate website VivaReal uses a remote-control robot to offer virtual access to model apartments. In New York, developers are giving virtual reality tours to prospective tenants of office buildings and retail centers still under construction.

While the onslaught of technology is rendering the traditional brokerage model irrelevant, it is also enabling the use of unproductive commercial real estate. Practitioners should consider diversifying their core business focus, from largely brokerage to consulting opportunities in space-need and location advisory, as well as property and facility management.

Client relationship management will hold the key to success. Similar to consulting firms, brokerage firms will need to shift their service model from regional to central client relationship management. Existing brokers can use innovative services, capitalizing on their prior experience and client relationships. For instance, companies can combine their rich bank of tenant data with geospatial and cognitive technologies to generate better insights on future real estate choices.
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Traditional players can also consider investing in or collaborating with startups to meld client relationships with new tools and technologies to offer the best of both worlds.

The Collaborative Economy

The commercial real estate sector as a whole is poised for a transformation as collaborative space usage gains ground. Many new players are capitalizing on this trend. For instance, one company leases large office spaces and subleases them on demand. In the retail space, online marketplaces such as Storefront offer a platform to brands, designers, and artists to find physical retail space for short duration pop-up stores. The collaborative economy can optimize rates on short-term spaces and create more value as it helps tenants obtain space that closely aligns with their needs.
However, current leasing and tenant approaches lack the flexibility to accommodate tenants’ varying demands. In response, traditional commercial space owners may have to rethink their approach to designing, developing, and redeveloping their properties. Along with fluid spaces, companies will need to consider new ways to enhance tenant experience. For example, in office properties, a hybrid approach may be the way forward, with a mix of long-term leases for core spaces and short-term flexible leases to manage ups and downs in workforce numbers.

The Talent War

Slowing population growth, the baby boomer retirement wave, and talent demands from competing industries – particularly health care, community services, and science, technology, engineering, and mathematics clusters – are likely to result in a war for talent in the next decade. That gives new emphasis to the workplace preferences of the incoming generation of professionals, the millennials, who tend toward freedom and flexibility. Their work-life barriers are porous, with many preferring to work from home or freelance.

As such, the per-employee office space requirement is likely to shrink. According to a Deloitte Canada report, the average office space per employee is projected to decline from 250 square feet in 2000 to 150 square feet in 2017, and 90 to 100 square feet in companies that have nimble workplaces. The upshot may be a demand for mixed-use spaces that include office, residence, and recreation options with many tenants even demanding small offices in their apartments.
As the war for talent intensifies, talent dynamics should be an integral factor in location-based decisions, especially for office property owners. Companies should estimate the future workforce using existing employment data and evaluate areas where knowledge workers are likely to live, work, and play. These may be close to the regions where they study and grow, such as cities with strong academic components.

The Last Mile

Growth in online retailing is redefining the use of brick-and-mortar stores, with retailers increasing focus on enhancing customer experience. Further, 3D printing will enable manufacturers to move to a build-to-order model rather than build-to-stock, which will allow them to sell directly to consumers. Indeed, retailers and some retail real estate owners are using different and flexible delivery options such as same-day or next-day delivery to create differentiation at the last mile.
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While brick-and-mortar stores will remain integral to some retailers, their utility will continue to evolve. They are likely to be used primarily for products that require touch and feel, or have significant service components. Overall, demand for traditional retail spaces will be weak.

That said, retail properties will be utilized in different ways. They could double up as fulfillment centers, especially for commoditized products that do not necessarily require touch and feel for purchase decisions. Further, on-demand retailing and manufacturing will reduce inventory holding, and potentially the demand for large warehouse spaces.
Retail property owners should continue to try different store formats, tailored spaces, and innovative techniques to enhance the end-customer experience. This would require incumbents to embrace sophisticated technologies.
Distribution and fulfillment centers should be a prominent part of industrial real estate owners’ property portfolios. As existing industrial property owners plan new development, they will likely benefit from acquiring and developing smaller and more flexible spaces within city limits that meet the demands for rapid delivery to end consumers.

Clearly, the physical and digital worlds are fast blurring. Technology, which is at the center stage of the current wave of disruption, also has the potential to help commercial real estate players meet these challenges. Companies will have to re-engineer operations and figure out optimal ways to organize and access talent. Bottom line, existing commercial real estate players cannot afford to ignore this disruption: The choice is between responding proactively to the evolving business landscape or risk being disrupted by the new entrants. 

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Categories Economy, Narrative

Finally AZ is Growing Again!

Arizona is growing again. Of all the states boasting job growth, we are at the top. We have been doing it with regional headquarters relocations, internal growth, and a robust tech market.

I give a lot of credit for this growth to our pro-business Governor Doug Ducey. This narrative is decidedly not political, but our growth is cause for celebration. 

One interesting trend we are seeing is Arizona taking a lot of jobs and business from California. We will see this trend continue, as Arizona is a great place to do business. See how many jobs have moved here in the past couple years by clicking here

Below is a cool infographic from Sandra Watson and her team at the Arizona Commerce Authority (ACA).  Between the ACA and the Greater Phoenix Economic Council, we are flat out kicking butt for jobs.

In Arizona, we are open for business.
Craig
602.954.3762
ccoppola@leearizona.com

P.S. – Last week we talked about driverless cars. Singapore is testing driverless taxis. Now! Autonomous cars are speeding up. Click here to read more. 


FY16-Summary-Infographic-page-001

Click Here to view the full pdf.

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Categories Economy, Narrative

Stalking Millennials and CRE

It seems like I am stalking all Millennials these days. Readers know why. They are changing the way we do business. Below is an article on how they are changing Commercial Real Estate. Here are a few takeaways for me:

  • Smartphones are here and they are being used for EVERYTHING. All our websites, media, packages, flyers etc. need to be smartphone compatible. 
  • Millennials are building their network online and are WAY less trusting of the good old boy network. I think this will lead to some hard life lessons as they start to realize not everything on the Internet is true.
  • Technology is changing so rapidly and Millennials are changing with it. Stay up to date or risk becoming extinct.

 

These are a few areas we are looking at today for our business. Hope you are as well.

Craig
602.954.3762
ccoppola@leearizona.com

P.S.- The Sharks are back for this week’s shocking video. Watch it on our website by clicking here.

Shock Stick
If you are unable to view the video, please click here.

How Millennials Will Change CRE

David Smooke
CRE Mill- 1
Jan 7 2016

As the Baby Boomers are defined by a war, the Millennials are defined by an invention. The U.S. Council of Economic Advisors summarized this generation’s technological shift aptly, “The significance of Millennials extends beyond their numbers. This is the first generation to have had access to the Internet during their formative years.”

The de facto study on Millennial demographics is conducted by Pew Research Center. They state, “The Millennial generation is forging a distinctive path into adulthood.” Like most industries, the day to day professional life of the commercial real estate professional must adapt to the increase of millennials in the industry. In defining millennials Pew continues, “Now ranging in age from 18 to 33, they are relatively unattached to organized politics and religion, linked by social media, burdened by debt, distrustful of people, in no rush to marry— and optimistic about the future.”

The innovations associated with the millennial generation (smartphones, internet, social media) are undoubtedly a part of the real estate agent’s day to day. For their businesses, 93% of real estate brokers use a smartphone and 91% use social media according to the realtor.org technology survey.

CRE Mill- 2

Kathryn KJ Juneau, a millennial CRE broker in Baton Rouge, encapsulates a generation’s distaste for an over-reliance on phone calls: “It’s the 21st century and you’re telling me I need to call you for information on a property? What about texting?  With our shorthand and abbreviations, we are quick and get right to the point. Why have a five minute phone call when we can text for less than 30 seconds?” (via SVNGLL).

Millennials expect the access to professional information to more closely resemble consumer facing research. Throughout the consideration and buying process, consumers have abundant access to reviews, ratings, and event direct lines to vetted sources.

“Millennials will also be pushing easier ways for seemingly small tasks,” reports the National Real Estate Investor. “For example, a text-to-confirm standard for initial property vetting—meaning Millennial agents will confirm smaller listing questions by simply shooting a text to the listing broker.”

CRE Mill- 3

Commercial Real Estate firms recognize the real business in keeping up with technology, social media and the behaviors of their buyer; the tech savvy millennial workforce is well positioned to thrive in the commercial real estate industry.

68% of first time home buyers are currently millennials, according to the National Association of Realtors.Millennials, as buyers and sellers, have traits that differ previous generations. Ironically as the first generation with social media, they have low levels of social trust. Pew estimates 19% of Millennial respondents say ‘they trust other people,’ compared to 31% of Gen-Xers and 40% of Baby Boomers.

CRE Mill- 4

What does this mean for the future profile of the commercial real estate professional?

“With millennials the advantage of the ‘rolodex effect’ is less tied to years of experience,” said Capstak President & Co-Founder Heather Goldman. “Today the Internet and new technology tools enable millennials to build online networks and more efficiently access information about listings, lending and investment opportunities and buyers. They are experiencing rapid career growth with new ways to broker deals and relationships.”

This mirrors the millennial generation’s buying behaviours. “Millennials who are first generation investors that don’t know who to trust will immediately turn to the internet as their first source,” reports The Nation Real Estate Investor. “A platform for online comparison of brokers would be their best friend. I imagine this platform would be like the Yelp for brokers—including reviews, specialties, locations served, price ranges, contact information, etc.”

This doesn’t mean the commercial real estate industry does not still demand the human touch. “Interpersonal communication is important, as are hand written cards on occasion,” says Juneau. “But my overall goal is to get my clients the information they want more quickly. We all know “time can kill a deal,” that’s real life. So, let’s all get aboard the information highway in CRE and zoom along like the rest of the world.”

It’s hard to talk about millennials without examining the role of a greater purpose in their economic activities.When realtor.org asked about the primary reason for purchasing a home, the “desire to own a home of their own was highest among millennials at 39 percent… Millennials were the most likely to use a real estate agent, mobile or tablet applications, and mobile or tablet search engines during their search.”

CRE Mill- 5

To re-iterate: the top factor driving a millennial to own residential real estate is their desire to own a home. It’s very tied to their personal purpose, i.e. I will here, I own here. The Washington Post went so far as to unearth Pew Research data indicating that owning a home was more important to millennial buyers than ‘having a high paying career,’ ‘living a very religious life’ or ‘becoming famous.’ WhileTime’s infamous “Me, Me, Generation” coining may remain at the top of our newsfeed, the millennial’s desire to own a home remains high. Commercial real estate sellers will have to cater to rising demographic of millennial buyers, where we’ve seen the first wave in the residential space.

Technology’s role in the ‘who-knows-who?’ and ‘who-knows-what?’ of commercial real estate cannot be separated from the millennial’s increased role in the commercial real estate industry. Commercial real estate firms are now faced with adapting to the millennial buyer and the millennial colleague.
 
Capstak is the commercial real estate community. Photo Credit REALTORS® & PEW Research Center.

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Categories Economy, Narrative

How Much You Need to Make to Buy a Home

While we specialize in leasing commercial office space, we watch the housing market very closely. Housing is a precursor to office space growth. Regular readers know this housing market recovery has been slow and multifamily has been on fire for the past 5-6 years. While there are lots of reasons for this, affordability may be one of them.  

The below infographic shows the average salary needed to buy a home in 27 US cities. Some takeaways: 

-Phoenix sits comfortably at $43,938—still not cheap.
-Larger cities, like New York City and Los Angeles, require nearly $100,000.  
-San Francisco sits at the top, requiring employees to earn a whopping $147,996.  This is one reason why we are seeing a ton of companies grow or expand to Phoenix from the Bay area. 

Why is this important? It has a huge effect on companies’ decision on where to locate. Over the long haul, millennials will want to own their homes.  Access to affordable housing should be on every decision maker’s checklist when they look for office space. 

Craig
602.954.3762
ccoppola@leearizona.com

PS Below is a link to a video featuring the #1 Shark at Lee & Associates. Need advice on your business from a shark? Give us a call. 

Meet the Sharks

Click here if you can’t view the video.


This infographic shows how much you need to make to buy a home in 27 US cities

Business Insider
Jeff DesjardinsVisual Capitalist
Apr. 5, 2016, 3:13 PM
Visual Capitalist
Photo 1
Courtesy of: Visual Capitalist
Click here to enlarge the picture.

The popping of the Greenspan-era housing bubble took about six years in total to fully “deflate”.

Most U.S. housing markets peaked sometime in 2006, and it wouldn’t be until just before the third-round of quantitative easing in 2012 that this fall would finally be cushioned. Since then, the combination of QE and record-low interest rates have helped re-inflate the housing market. For better or worse, real estate in many U.S. cities are now approaching or passing their 2006 housing highs, but with a growing disparity between individual metropolitan areas.

Today’s 3D map comes to us from HowMuch.net, and it shows the very different salaries needed to buy a median home in 27 different U.S. metropolitan areas. The salaries range between $31,134 to $147,996, which is a discrepancy of over $100,000.

At the low end of the spectrum, it takes a salary of between $30,000 to $40,000 to buy a home in most metropolitan areas in the Midwest. In St. Louis, for example, the salary needed to buy a home is $34,778. Pittsburgh was the least expensive city analyzed, where a salary of $31,135 could buy the median house in the city.

At the high end is any metropolitan area in California, for which closer to six figures is now needed. San Francisco has the most expensive housing in the country, where residents must make $147,996 a year to be an average homeowner. However, Southern California is not far behind the Bay Area, where salaries of $95,040 and $103,165 are required to buy in Los Angeles and San Diego respectively.

See the full data set, including mortgage rates, monthly payments, and median house prices here.

West Coast envy

Which cities have rebounded the most since the popping of the housing bubble?

According to The Economist’s interactive chart on U.S. housing price indices, the average U.S. market recovery between 2006 peak and 2012 trough has been about 63.9%.

The Eastern half of the country has struggled to rebound to 2006 housing highs, with New York City, Baltimore, Philadelphia, Chicago, Tampa, Miami, and St. Louis all recovering below the above average mark.

In contrast, prices in the West are soaring: San Francisco, Houston, Dallas, Denver, and Portland have all met or exceeded their 2006 highs. Meanwhile, Los Angeles, Seattle, and San Diego have recovered better than average.

Read the original article on Visual Capitalist. Get rich, visual content on business and investing for free at the Visual Capitalist website, or follow Visual Capitalist on Twitter,Facebook, or LinkedIn for the latest. Copyright 2016. Follow Visual Capitalist on Twitter.

 

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Categories Economy, Narrative, Office Market

Understanding The Office Market: Q1 2016 Phoenix Office Report

Office leasing is off to a good start in 2016.  Here in Metro Phoenix, the market saw 641,000 square feet (SF) of net absorption (office jobs added) recorded in the first quarter.  This means Metro Phoenix is on track to absorb approximately 2.5 million SF for the year. That would mean another year of consistent, average net absorption, since 2.5 million SF matches our 25 year average.

However, based on current activity early in the second quarter, I wouldn’t be surprised if we have another outstanding year of job growth like last year (3.4 million SF absorbed).  While there are still some dead spots within the market, activity is mostly up across the Greater Phoenix region.  For tenants I represent, there is often activity on spaces under consideration, and they no longer have months to make a decision.  I’m also seeing increased tour volume at the buildings I lease across the Valley.  Vacancy, at 19.4%, has remained virtually unchanged from Q4 2015 due to the 1.1 million SF of new construction that delivered this quarter.  A 19.4% vacancy seems very high, especially when compared to other major markets across the United States.  For Metro Phoenix, it just means that we’re getting closer to equilibrium levels for vacancy of 15-17%.  At these figures, it’s neither a tenant’s nor a landlord’s market.
 
Below is a link to our Lee & Associates 1st Quarter Report and as usual, I’ve included my top takeaways below:
 
1.       Numbers show that Tempe and South Scottsdale remain the two most desirable places for offices.  Tempe led the way with the most net absorption with 256,000 SF while South Scottsdale boasts the lowest vacancy of any major submarket at 11%.
2.       The Superstition Corridor had the second highest net absorption in Q1.  With lease rates heating up in choice submarkets like Tempe, it makes sense that tenants would be priced out and looking for less expensive buildings along the US 60.  It also speaks to the strong demographics of the East Valley.
3.       The top lease in the market was CVS who took all of Four Gateway (444 N. 44th St., Phoenix), a very nice 140,000 SF block of space formerly occupied by State Farm.  Negotiations started taking place before State Farm’s lease expired at the building.  The large blocks of space that State Farm will vacate in the 44th Street and Tempe submarkets may not have such an adverse effect on vacancy as everyone thinks.
 
If you have a question on your lease, want to find out how much your building is worth, or just want to talk about the market, please give me a call.

Andrew
602.954.3769
acheney@leearizona.com


 

Click Here for the Q1 2016 Phoenix Market Report

Q1 Report

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Categories Economy, Narrative

Wrap Your Head Around These Companies vs. Other Countries

Most of the time we hear how important China is becoming; how the reemergence of Russia is going to affect the US; and of course all the dramatic stories of the meltdowns of Greece and now Puerto Rico. I always try to wrap my head around how these developments will play out in my backyard (Metro Phoenix) and in our business of leasing or selling office space.

Below is a cool graph that shows the worth of US companies and compares them to countries’ entire emerging market stock indices.

Note:
–Intel is worth as much as Russia (Intel has invested over $20 Billion in Arizona since 1979 http://www.chandleraz.gov/content/Intel_inArizona.pdf )
–Expedia is worth more than Greece (Expedia is growing in Arizona, they have jobs open and are hiring)
–Wells Fargo is about the same as India (Wells is the 5th largest employer in Arizona with over 15,000 employees)

I am not trying to be myopic or an isolationist, rather I want to know where my bread gets buttered. For me and commercial real estate in Arizona, it’s companies like these who do the buttering.

Craig
602.954.3762
ccoppola@leearizona.com


Wrap Your Head Graph

Categories Economy, Narrative

Snapshot of Arizona Economy

Below is a great snapshot of Arizona and where we are with our economy. In addition, I’ve added a couple extra tidbits that are not in the below infographic:
 
–Arizona still lags in job creation. We are not quite back to 100 percent of our jobs lost (even though we have regained 314,000). This is the first time ever that Arizona has not lead the country. Why? The housing market continues to be lackluster. Everything else is doing well. This is ultimately a great sign for Arizona.
 
–Arizona has a very pro-business environment. The state maintains a balanced budget and added no new taxes this year. If you want to see 10 things that happened so far this year, click here.
 
–Here is a little background about Banner Health Care becoming our largest employer—They bought the University of Arizona Medical School adding 8,000 employees. This is just the beginning of the story regarding growth in Arizona for medical related jobs. Read here for more.
 
Arizona is doing just fine.

If you would like to talk about job creation and its effect on the real estate market give me call.
Thank you,

Craig
602.954.3762
ccoppola@leearizona.com


Please click here for the entire article.

Arizona Employment Rates

Categories Economy, Narrative

Employment Growth – Employer Payroll Survey vs. Household Survey

My favorite economist who tracks the national economy and the US office market is Peter Linneman. He produced the graph below which shows job loss and gain during the recession. This graph demonstrates exactly why I follow the jobs market so closely and why most office markets in the US have been slow to recover. Surprisingly, there are just a few markets that have done exceedingly well. Austin is at over 600% of prerecession jobs and Houston is at 308%. Nice!
 
Phoenix sits at only 68% of the jobs lost, creating an office market vacancy still over 20% today. Take a look at your market and where it stacks up. There are a couple that are still just above 50%, with the rest still struggling to just get back to where they were six years ago.

 

Craig
602.954.3762
ccoppola@leearizona.com


 

Linneman_Dec 2014

Categories Economy, Narrative

Spheres of Influence

Every now and then I see cool graphs that grab my attention. Site Selection magazine ran the below graphs showing the top industries and the top projects of the year (2013).
 
I found the following insights:
–Where companies are headquartered and the size of each company are very interesting. There is some clustering, but not always.
–Transportation is driving the economy, especially in Asia.
–The shale gas and fracking revolution is here and it is powerful.
–The global economy is now so ingrained into our world that we cannot even think about separating it. 
 
At the bottom of the page, below the graphs, is a model provided by Bill Koenig from Of Interest Today. Take a look to see where all the parts of a Boeing jet come from in the world. Amazing.
 
We live in the most exciting times don’t we?

Craig
602.954.3762
ccoppola@leearizona.com

P.S. Last week, Dodo Cheney, Andrew’s grandmother and International Tennis Hall of Fame member, passed away at 98 years old. When Andrew started working with me 14 years ago, I forced him to fly over to California to introduce me to Dodo. She was 84 years young at the time. It is not every day you get the opportunity to meet someone who has won a grand slam singles title as well as 391 US tennis championships. She did not disappoint. Feisty, competitive, and funny, she lived her life the way all lives should be lived, with passion. God Bless her and the entire Cheney family. What a legacy she leaves. The picture below of Andrew and Dodo was taken at Wimbledon’s Centre Court back in 2003. Click here to read her obituary from the New York Times.

Dodo and Andrew_cropped 3        Dodo_NY Times 2

Andrew with Dodo at Wimbledon in 2003 and Dodo with John McEnroe, her presenter when she was inducted into the International Tennis Hall of Fame in 2004.


Site Selection March 2014_Page_1

Site Selection March 2014_Page_2

OIT - 787 Structure Suppliers

Categories Economy, Narrative

7 Bold Commercial Real Estate Predictions

In my weekly narrative, I spend quite a bit of time thinking, talking, and looking at the future. Below are seven bold predictions by some of the leading thinkers in our industry. Here a few key predictions that stand out:
–Malls will soon be extinct
–Technology will run buildings (we see that coming today)
–Green buildings will become the norm
–Our schools will require a tremendous amount of money to retrofit just to EPA code—try $75 Billion.
 
We hope to continue providing you updates and insights long before they happen.

Craig
602.954.3762
ccoppola@leearizona.com

P.S. A month ago, I got to hike and summit Mount Kilimanjaro, Africa’s tallest mountain with one of my partners at Lee & Associates, Jim Watkins…I created a brief slide show of our experience. If you’d like to see some cool photos, please click here. Below is a photo of Jim and me at the summit. We will lease space anywhere!

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7 Bold Commercial Real Estate Predictions

CNBC

By: Robin Micheli
March 24, 2014

Conjuring the future of commercial real estate begins by conjuring our future. How will we work, live, shop or do business? Perhaps no other investment sector is so closely tied to people’s most fundamental needs and behaviors; its evolution, to a large extent, follows ours.
 
Take it from Peter Linneman of Linneman Associates and the Albert Sussman Emeritus Professor at The Wharton School of Business, who pioneered the academic study of real estate and was named by the National Association of Realtors as one of the 25 most influential people in the business. Commercial real estate, he said, “exists to service the economy and society. That’s all we do.”

Over the next 25 years, say Linneman and other key players in the industry, commercial real estate will be buffeted by changes in demographics, technology, globalization, economic and environmental realities and a host of other trends. Some pieces of the trillion-dollar global industry will adapt; others will fall away. It will still be a cyclical business, but no matter how it changes, commercial real estate is expected to be thriving in 2039.

Here are seven bold predictions about U.S. commercial real estate in 2039.

1. Most shopping malls will be extinct.
The world of the American shopping mall, said Kenneth Riggs, president and CEO of Real Estate Research Corp., “has been a Darwinian environment since the 1990s with the advent of big-box retail and the ‘Wal-Marting’ of the world—and it will stay that way.” In other words, expect malls to continue their decline due to the rise in e-commerce, with only those consistently producing very strong revenues still doing business in 25 years.

“As the J.C. Penney’s and Sears continue to lose market share to online retailing, you’re going to see more dead malls where the anchors go dark and ultimately are worth only the land they’re built on,” said Tom Bohjalian, executive vice president at Cohen & Steers, which was the first investment company to specialize in listed real estate.

Teardowns may not be the only way to capture value in defunct malls, though, said Rick Fedrizzi, president, CEO and co-founder of the U.S. Green Building Council. He predicts that with repurposing, they’ll be a useful resource when our way of life swings back to revolving around more compact communities. “Established places like shopping malls will become like town centers, where people can come together, where their doctors and day care will be, where they can gather after major devastations.”

2. Brick-and-mortar will go tech—and warehouses will go back to the drawing board.
As consumers increasingly shop on their computers and phones, brick-and-mortar retailers will need to adopt the attitude ‘If you can’t beat ’em, join ’em’ in order to survive. Innovation will be key, making use of technology that integrates omnichannel shopping into the physical experience of being in a store and matching the logistical advantages of online merchants.

“People want to look and touch; they want instant gratification, too,” said Maria Sicola, an executive managing director at real estate services firm Cushman & Wakefield, even as selling floors become smaller. “Perhaps there will be the equivalent of a mini warehouse within the store so you can go in the back room and buy what you want.”

Apple is one retailer already using this forward-thinking approach in its stores. Its sales floors feature products that people can touch and try on their own, spending as much time as they’d like. They can buy and take home merchandise if they choose, or they can go home, do further research and buy online—with free overnight shipping. This may be a model other retailers will emulate.

Efficient distribution will be key, and the increasing importance of logistics and automation will impact warehouses across the country, many of which are obsolete even now, lacking up-to-date technology and adequate clearance height and often too remote to accommodate same-day delivery. That will add up to a lot of activity in the industrial sector in coming years, with old warehouses being retrofitted or new ones being built.

3. Baby boomers will be behind the biggest construction boom.
The big generational bulge of the 20th century hasn’t finished exerting its outsized influence yet, and commercial real estate will continue feeling its weight in the next quarter century. “We’re an aging population, so in 25 years there’s going to be a heavy focus on medical-related facilities,” said Riggs, who also predicts a shift back toward affordable, multigenerational households that will translate to increased multifamily residential, particularly in close proximity to mass transit.

In seven years boomers will turn 75, a magical number in one way, said Linneman, because that’s when people usually begin moving into senior housing. When this huge and demanding demographic is ready for the next stage of their lifestyle, rest assured: “It will explode,” he said. “Right now senior housing is a food group in real estate, but it’s like vegan or something, not that established. In 25 years it will be a major food group.”

4. Urbanization will sweep the planet.
If there’s one thing all our experts were clear about, it’s that our world will be significantly more urbanized in 2039. There will be a rise in the number of megacities—urban areas with more than 10 million inhabitants.

Baby boomers will be part of that phenomenon—many empty-nesters are attracted to the manageable charms of the city—but it’s the desire of Gen X and Gen Y cohorts to live, work and play in a compact area that’s largely fueling the trend. Multifamily residential stands to gain, but companies keen to attract young, educated talent are paying attention, too, and positioning themselves accordingly.

“Some businesses today consider location even more important than compensation in recruitment efforts,” said Rick Cleveland, a managing director at Cushman & Wakefield. “That’s driving a lot of the trend toward urban areas.”

That doesn’t mean that any old building on any city block will suffice for the worker of 2039. “The features that older-generation office spaces have, in terms of locations and amenities surrounding or in the facility, don’t work for the new-age tenant,” said Sicola, who points to companies in Manhattan that are abandoning Midtown for the west edge of the island and buildings that can be retrofit for open infrastructure. “For baby boomers, it was ‘live to work,’ but Gen Xers are working to live. They like to take breaks, have fun. Incorporating that into the workplace is critical.”

5. The much-reported death of the suburbs will prove to be greatly exaggerated.
As important as cities will be, however, suburbs won’t simply die. “The suburbs want to become more like urban centers. Millennials want to be there, but in an environment where they can combine their work-and-play lifestyles,” said Steven Blank, a former investment banker in real estate finance and now a senior fellow at the Urban Land Institute.

“Mixed-use projects take advantage of that,” he added. “We’ll see a lot of existing office complexes re-engineered to comprise transient components, rental, retail, office. One example right now is the Time Warner Center, albeit in Manhattan. One tower is the Mandarin Oriental hotel and office space; the second was built as the headquarters of Time Warner. And there’s a high-end shopping space, restaurants, condominiums. These are a wave of the future.”

Fedrizzi believes that suburbs will aim to replicate the city experience. “The way most of the suburbs will evolve is that there’s an interim step; they’ll be connected to cities by high speed or light rail, and they’ll become walkable communities with a sense of place.”

That will require a change in today’s “definition of building: newer and bigger. There will be a sense of going back to the past, to a place that’s a little more thoughtful,” Fedrizzi said.

6. Work spaces will be transformed by technology.
Call it the “Googlization” effect: Cleveland and Sicola expect office complexes of the future to look and function more like today’s technology company campuses, with open spaces, large workbenches mixed with more personal plug-and-go digital workstations and amenities like massages, bistros and dry-cleaning onsite.

Henry H. Chamberlain, president and COO of BOMA International, agreed. He foresees more densely populated office spaces as the globalization of business kills the traditional 9-to-5 workday and requires companies to be staffed 24/7. Key to their operation will be tech tools, such as teleconferencing, to stay connected to the international marketplace.

To accommodate the needs of the workplace, Chamberlain believes that these will operate as “smart buildings.” “Running a commercial office building will increasingly become a high-tech job,” he said. “It will require property managers and engineers to possess IT knowledge to keep buildings online.”

They will take on a whole new meaning, especially in the area of security. “Not only will technologies be integrated into buildings to track who enters or leaves the property, but access will be tailored to risk, tenant population and potential threats.”

7. Green buildings will come of age.
While sustainability is gaining traction in Europe, it remains more of a buzzword than an actuality here in the U.S.—but that’s changing. Efforts to meet environmental standards at this point tend to be costly, but they’re a long-term imperative, and most everyone in the industry recognizes it. “Sustainability is not economical,” said Cohen & Steers’ Bohjalian. “It’s a downward bias on return, but it’s the necessary evil.”

The gold standard in sustainable building design and operation is the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design), levels of certification based on points earned in various credit categories, like water efficiency, indoor environmental quality, sustainable building materials and reduction in waste. “I tell people it’s like the nutritional information on a box of animal crackers,” said Fedrizzi.

There’s no doubt that all buildings 25 years from now will need to be up to LEED standards, he said, which will mean that many existing structures, especially some of the cheaply constructed ones of the ’80s, will have to be torn down. “Some you couldn’t retrofit if you wanted to.”

But LEED standards have always changed with the times, since their inception 14 years ago, and what constitutes a LEED-certified building—indeed, the future of all buildings, as Fedrizzi sees it—will be different in 2039 than it is now. “Instead of a nutrition label, the metaphor going forward is of a speedometer, measuring performance.”

The skyscraper of tomorrow will monitor how much energy-sapping CO² is in the air—perhaps via devices on employees’ wrists—and increase ventilation rates accordingly. The building will similarly monitor light, energy, water and heat levels and respond by controlling them, increasing efficiency as well as human and environmental health. (Fedrizzi imagines there will be a lot of agriculture on rooftops, as well.)

As a final word, warned Fedrizzi, don’t underestimate how much needs to be done to make our communities livable for the long haul: “Our schools are so decrepit, it will take $75 billion worth of upgrading to bring them up to code that the Environmental Protection Agency has already said is the baseline.”

Perhaps in 2039 our schools will be our most important—and sustainable—buildings of all.

Categories Economy, Narrative

5 Measures of Arizona’s Economy As Fall Season Arrives

The local paper in Phoenix, The Arizona Republic, published a great summary about the Arizona economy and my favorite topic—Jobs. Please take a look below for the full article, but here are a few highlights:
 
–We are still at 60% of jobs recovered from pre-recession numbers.
–Construction, typically our get-out-of-the-slump card, is severely lagging.
–One bright spot is medical expansion. Arizona is becoming quite the spot for destination treatment, including the fabulous Banner MD Anderson facility in Gilbert. (Ok, that’s a plug for one of my favorite not-for-profits.)
–Education continues to lag compared to the rest of the US. This will be a topic of continued discussion during the next few months. I know both candidates for Governor are focused on this campaign hot potato. 
 
I am bullish on Arizona, not just because this is my home and my family’s home for over 100 years. I believe this state has its best days ahead of it. The slow recovery aside, I believe the future looks bright.

Craig
602.954.3762
ccoppola@leearizona.com


5 Measures of Arizona’s Economy As Fall Season Arrives

azcentral

By: Ronald J. Hansen
August 31, 2014

AZ economy_fall 2014
(Photo: Charlie Leight/The Republic)

Labor Day has become the unofficial end of summer. As it was intended as a celebration of workers, this seems a good time to ask whether workers have much to celebrate in Arizona. Here are five measures of the state’s economy heading into the fall, with some bright spots highlighted.

1. Jobs remain scarce

Before the Great Recession, Arizona’s unemployment rate stood at 4 percent and the state was awash in growth. Five years after the downturn technically ended, Arizona has restored less than 60 percent of its recession job losses. The state has a 7 percent unemployment rate. Both of which are well behind the national average.

Bright spot: Much of the expected growth in jobs over the next two years will be in health-care services, retail positions and in the hospitality industry, said Aruna Murthy, director of economic analysis for the Arizona Office of Employment and Population Statistics. Arizona also should continue to see rapid growth in jobs in financial activities, although it remains a small portion of the overall workforce.

2. Wages are flat

For those who have work, wages in Arizona have scarcely moved in recent years after adjusting for inflation. While employers have groused that skilled construction workers, for example, are hard to find, the expected wage inflation in those fields hasn’t materialized, said Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W.P. Carey School of Business at Arizona State University. Instead, the state typically sees about 2 percent an­nualized wage inflation, he said.

Arizona isn’t unique in having relatively flat wages. It has been happening nationally for years.

Bright spot: It is hoped that as jobs in health-care services and the financial sector continue to grow in Arizona, that growth will help lift the average wage profile for workers here. CEOs increasingly cite Arizona as a desirable place to do business, in part because of relatively low taxes and low worker costs, McPheters said.

3. Construction hasn’t recovered

No industry personifies Arizona’s boom-to-bust character better than construction. The field peaked at 244,000 workers in mid-2006 and today employs 118,000. The loss of its relatively good wages also has rippled through the wider economy. “The big surprise has been that construction is dead in the water, and that’s been one of our drivers,” McPheters said.

Murthy said hopeful near-term signs in construction are still hard to find. Permits for residential construction have picked up recently, suggesting more work may come in the months ahead, she said. But construction of non-residential buildings in particular has fallen off.

4. Spending is low

Not surprisingly, a weak job market and relatively flat wages have hurt Arizonans’ buying power. Per capita spending remained lower in Arizona in 2012 than it was in 2007, even after adjusting for inflation. Only Nevada fared worse. It takes money to spend; too many Arizonans have too little of it.

Bright spot: While spending figures aren’t great, they are improving. Retail sales have been steadily rising, and sales of autos in particular have grown sizably in recent years. Vehicle sales are back to 80 percent of pre-recession levels.

5. Education still matters

Arizona ranks 29th in the nation in the percentage of adults with four-year college degrees or more and eighth in the U.S. for the percentage of adults with less than a ninth-grade education. Add to the data a troubling reputation as a state that spends relatively little on primary education. States that tend to have greater shares of college-educated workers tend to have higher incomes.
And when considering whether to relocate to a new state for work, executives and other college-educated parents also consider education quality.

Bright spot: While the educational picture at the state level isn’t great, college attainment in the Phoenix area generally matches the U.S. as a whole. However, compared with other metro areas, Phoenix still lags in four-year degrees.

Categories Economy, Narrative

Phoenix Housing Double Dip Recession?

No recovery is smooth. There are fits and starts. There are blue skies and cloudy. The Phoenix housing market, which in past years has driven the office market, has cooled off and is pulling back. Nobody thinks this will be a full recession, but there are clear signs that all is not peachy in Phoenix. I believe this to be true in most markets. Job creation, still anemic, is what drives people to buy and the job market is still lagging. See below for some key data, a few highlights, and some anecdotal stories from the trenches.

I remain bullish….We need continued and sustained job growth to bring the market back.

Craig
602.954.3762
ccoppola@leearizona.com


In Phoenix, a Realty Check as Market Moderates
From Bust to Rebound to a Return to Normal as Sales Cool

WSJ

By: Nick Timiraos

Updated Aug. 18, 2014

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To understand why the U.S. housing market this year isn’t providing the lift many economists expected, look to Phoenix.

Among the cities most battered by the 2006 bust, Phoenix was the first to snap back in 2011. Prices, off by 56% from peak, then rebounded sharply, trimming that drop by a third. The number of homes in some stage of foreclosure has fallen to about 4,300 today from more than 50,000 four years ago.

Now, prices and sales are cooling off. Inventories of homes listed for sale have climbed to their highest level in three years while the number of houses sold in June fell 12% from a year earlier. The rebound during the past two years “gave people a false sense of how quick we would recover,” said Jim Belfiore, who runs a local home-builder consulting firm.

Sales in other once-hot markets also are slowing. Inventories in Washington, D.C., rose by a third in July from a year earlier, while sales were down 8%. Listings in Sacramento were up 44%, as sales dropped 11%. In Las Vegas, sales slid 10%, while the number of listings without offers rose 53%.

Economists predicted double-digit gains in home sales nationally this year would help spur economic growth, but sales are down more than 5% over last year.

“There appears to be a conservatism among consumers and their willingness to take on big-ticket purchases,” said Doug Duncan, chief economist at Fannie Mae, whose view of the housing market has deteriorated recently. In a report Monday, Fannie cut its national housing forecasts for this year and next.

Fannie now expects new-home sales of 431,000 this year, down 11% from last month’s forecast, which would represent a gain of just 0.6% from last year.

While activity is expected to pick up next year, it still won’t be “the breakout year some are expecting,” said Mr. Duncan, who cut the 2015 forecast for new-home sales by 14%.

As the foreclosure boom that fueled much of the recovery fades, income and population growth are reasserting themselves as drivers of the housing market in places such as Phoenix.

Meanwhile, lingering scars from the bust are playing out as some of the country’s hottest housing markets struggle to pass the baton from bargain-hunting investors, who typically pay cash, to traditional buyers with mortgages.

The good news in Phoenix, as across much of the country, is that the foreclosure crisis largely has faded. That drop-off was a big driver behind the surge in prices as more buyers, especially investors, chased fewer homes. Rising prices have led homeowners to test the market and investors to retreat, a trend playing out nationally.

Home prices are up nearly 46% from the 2011 low. Investors accounted for nearly 15% of homes bought in June, down from about one-quarter last year and one-third of sales in June 2012, according to Mike Orr of Arizona State University’s W.P. Carey School of Business.

In Phoenix, slow job and income growth are among the reasons builders aren’t benefiting from the drop-off in foreclosures, especially as investors and foreign buyers have pulled back.

Employment in Phoenix, after expanding at an average annual pace of 2.6% and 2.8% in each of the last two years, is up just 1.5% so far this year, state figures show.

“If people don’t have jobs, they’re not buying homes,” said Greg Markov, a local real-estate agent.

The sluggish local economy is compounded by consumers still too battered from the bust to think about getting a loan. Some don’t have sufficient equity to turn a house sale into an adequate down payment on their next purchase. Others suffered credit blemishes or income hits that make banks reluctant to lend.

“It is taking longer for folks who went through the downturn to re-emerge,” Mr. Belfiore said. “Traffic at new-home developments is strong, he said, but “people are not pulling the trigger.”

David O’Hagan needed three months and two price reductions to find a buyer for his five-bedroom home in the Phoenix suburb of Peoria. The sale is set to close this week for about 5% less than the $259,000 he initially asked, though in four years he will have turned a sizable profit.

“I had hoped to see more traffic. It was a little disappointing,” said Mr. O’Hagan, who is a transportation manager for a food company and is moving his family to Maine.

Phoenix stands in contrast to other cities such as Houston, Dallas and San Francisco, where better job growth is fueling stronger demand.

Mr. O’Hagan, 39 years old, recently sold a separate rental home in a Dallas suburb in just days after 65 buyers showed an interest. It was “a complete polar opposite” from Phoenix, he said.

Builders, who paid premiums to buy land last year in anticipation of a rebound, have raised sales prices aggressively. “Maybe a little too much,” said Michael IlesCremieux, vice president of land acquisitions at Scottsdale-based Meritage Homes Corp.

The increase in inventory has been great news for buyers like Rose Eltanal, a 39-year-old attorney who started house hunting in 2010, but twice shelved her search. Last month she negotiated to buy a four-bedroom ranch-style home, initially listed at $599,000, for $515,000. She says she was tired of “throwing the money away” on rent.

Some early investors, meanwhile, are cashing out.

Jon Mirmelli, a real-estate agent, last year sold seven homes he had acquired since 2010 as rentals. He is now selling two dozen more homes for a national investor that he declined to name.

But he doesn’t see a big risk of further price declines because other investors are still combing the desert for deals. The discounts of years past are “something I’m not going to see again in my lifetime,” he said. “We have a normal market again.”

Categories Economy, Narrative

Highlights from Arizona State University’s Annual Economic Outlook

Over the last two weeks, I have talked about the numbers behind the job numbers in the US and Arizona. Of course, there are people much more qualified and articulate who actually track this kind of data for a living. Arizona State University’s annual Economic Outlook produced some quality information that I thought I would pass along. I am making sure my team focuses on the daily slog to get through to the other side of this Great Recession. We are still in it and it seems it will last another two years here in Arizona.

Below, there are a number of different graphs that tell the story of the US and Arizona job and population growth in a great format. Additionally, I have added some information on the millennial generation and their impact on our recovery. Take five minutes and scroll down. If you are really interested in the complete story (I only pulled a select handful of slides), I have included the link to the complete presentations below each group.

I promise, no jobs discussions for an extended period. Next week, back to some cool, interesting, and thought provoking articles.

Craig
602.954.3762
ccoppola@leearizona.com

 

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http://knowwpcarey.com/uploads/mcpheters-slides-may8-2014-vs2.pdf

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http://knowwpcarey.com/uploads/orr-slides-may8-2014.pdf

Categories Economy, Narrative

Comparing the U.S. and Phoenix Economies

Last week I discussed the labor market and what is happening in Arizona with job gains and the office market. This week I have pulled some information from the Brookings Institute on our economy and the recovery compared to the rest of the US. Here are some of my takeaways:

–Phoenix will remain one of the fastest growing metropolitan areas in the US over the next decade and even this year.

–We will do just fine, but have a ways to go.

–I believe the holdup is housing. Metro Phoenix remains very much a growth metropolis. Housing starts have been way, way off for the past six years and in 2014 they are horrible. It is unheard of to have under 10,000 starts for our metro area six years into the recovery.

–I did include a nice article from Forbes about the 20 fastest growing cities in America. Phoenix is now #3. Scroll down below the Brookings info to read more.

Keep your long term positive outlook for Arizona high. For today, keep your head down and keep grinding it out.

Craig
602.954.3762
ccoppola@leearizona.com

 

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America’s 20 Fastest-Growing Cities
Forbes
By: Erin Carlyle
February 14, 2014

Job Creation
View the entire slideshow of photos at:http://www.forbes.com/sites/erincarlyle/2014/02/14/americas-20-fastest-growing-cities/

When New York-based research firm Ipreo was looking to expand into a new office, the company searched nation-wide for the perfect location. “The primary goal was access to talent,” says O’Hara Macken, an EVP and managing director, “and the [Research] Triangle was our top choice in the U.S.” Ipreo, which provides data, software, and intelligence to the capital markets and public companies, opened an outpost in Raleigh, N.C. last year. It moved 70 employees from New York and Bethseda, Md., hired 80 locals, and plans to hire 100 more.

Raleigh, N. C. is growing at a healthy clip–fast enough to land  the No. 2 spot on our annual list of America’s Fastest-Growing Cities. At the nearby Research Triangle Park, more than 170 companies have outposts, including IBM, GlaxoSmithKline, Syngenta, Credit Suisse, and Cisco. The wider area is also home to several major universities: North Carolina State University is in Raleigh, while Duke University is situated in nearby Durham, and the University of North Carolina at Chapel Hill. The combination of universities and job opportunities has made for a highly educated population: nearly 50% of people ages 25 to 65 have a college degree. These draws keep many grads in the local area, says Harvey Schmitt, chief executive of the Greater Raleigh Chamber of Commerce. “We’ve got great quality of life. You’ve got the university system, great health care, a decent climate year-round, and affordable cost-of-living.”

Those factors, plus a relatively low cost of doing business (FORBES ranks N.C. 4th on its list of Best States for Business) are attracting more companies to the area. MetLife recently opened a 1,300-employee IT campus in Cary, a western suburb, and software company Citrix is opening a campus in Raleigh’s downtown later this year. Raleigh is also a hub of smart grid activity, and the president recently announced a $140 million grant to create an advanced manufacturing institute to NC State. Raleigh’s jobs grew at a rate of 2.44% year-over-year while the population jumped an estimated 2.15% in 2013. Even faster population growth is expected in 2014. All of this was enough to push Raleigh up two spots from its slot last year, to rank No. 2.

Behind the numbers:
To cull our list, we began with the 100 most populous Metropolitan Statistical Areas (MSAs) in the U.S., geographic areas designated by the U.S. Office of Management and Budget that  include cities and their surrounding suburbs. We rated these places based on six metrics. Using data from Moody’s Analytics, we assessed the estimated rates of population growth for 2013 and 2014, year-over-year job growth for 2013, and the rate of gross metro product growth—a.k.a. the economic growth rate–for 2013. We also considered federal unemployment data and median salaries for local college-educated workers, courtesy of Payscale.com. The result is a list of the 20 fastest-growing metro areas in America in terms of population and economy.

Two states–Florida and Texas–each boast four cities on our Fastest-Growing Cities List this year, with three of the Texas cities ranking in the top 10: Austin (No. 1), Dallas (No. 4), Houston (No. 10), and San Antonio (No. 20). Strong population growth in 2013 and unemployment under 6% –well under the national rate of 6.7%–helped all four cities make the top 20, although last year the cities did even better, with Austin, Houston, and Dallas sweeping the top three slots. Given its business-friendly regulatory environment, lack of state income tax for corporations or people, and highly educated labor market, it’s perhaps not surprising that Texas continue to grow.

Austin takes the top spot on FORBES’ annual list of America’s Fastest-Growing Cities for the 4th year in a row. With a 2.5% population growth rate (estimated annual) for 2013—the highest of all the geographic regions—and an economy that expanded 5.88% last year, it’s hard for other cities to compete these days. But the area wasn’t always booming. The first tech bust wreaked havoc on the region, which was heavily weighted in software, semiconductors, and dotcoms. In 2004, the Austin Chamber of Commerce launched a proactive effort to recruit businesses from diverse industries, focusing exclusively on California, the Upper Midwest, and the Northeastern states—places where the cost of doing business is at a distinct disadvantage compared to Austin’s. “We’ve had 307 companies move here in the last 9 years,” says Dave Porter, Senior Vice President, Economic Development at the Austin Chamber. “And about 100 of those come from California.”

With the 48,000-student University of Texas churning out engineers and computer scientists, the five-county area has a robust workforce–38% college-educated—to fill up those desks. Half of the adult transplants flowing in possess a college degree, Porter says. In addition to major corporations like Whole Foods and Dell (in Round Rock, part of the greater MSA), Austin now boasts some 4,000 technology companies which represent about 35% of the area’s total payroll. Athena Health is bringing 607 jobs to Austin, and San Francisco-based Dropbox is expanding there. As for keeping its edge, Austin has collected over $40million from the private sector to keep recruitment efforts up. “The competition for jobs is fierce. We can’t let our guard down,” Porter says.

Phoenix also makes the list this year, jumping a whopping five spots to No. 3. “That certainly shouldn’t be a surprise to anybody, because they are among your leading growth states,” says Lee McPheters, a director of the JPMorgan Chase Economic Outlook Center of Arizona State University’s W. P. Carey School of Business. “But they were really hit hard by this most recent recession, which is why things have been bit subdued over the past few years.” Construction industry jobs, which dropped 50% in the state during the downturn, are up 5% year-over-year, McPheters notes. Surprisingly, Phoenix—not New York—is No. 1 in the nation in terms of growth in finance industry jobs, adding 8,300 from December 2012 to 2013, says McPheters, whose research team does its own economic rankings each month based on Bureau of Labor Statistics data. Insurance and health care are also growth engines. Add to that an estimated population growth rate of 1.67% for last year and a projected growth rate of 2.46% in 2014, and Phoenix is expected to be the 4th fastest-growing metro area in terms of population this calendar year.

Dallas, on the other hand, moved down a spot, from No. 3 to No. 4. Considering that most of the country is seeing sluggish population growth, Dallas’ projected rate of 2.08% for 2014 is pretty good, and the local economy’s year-over-year growth rate of 3.57% quite healthy. A strong business climate, low taxes, and the ease of serving both the East and West Coasts are among the metro area’s business attractions. Over the past two years, some 51 companies moved or announced plans to move to the Dallas-Fort Worth area. Among them are Neovia Logistics Services, a logistics company that moved its headquarters from Illinois to the western suburb of Las Colinas, and Kohl’s, which announced plans to open a customer-service center in Dallas. Motorola Mobility also recently opened the first smartphone assembly plant in the United States, hiring 2,000 workers in Fort Worth (part of the greater M.S.A.). Economic strength: the area is a hub for logistics and distribution, technology, and support services like law and accounting firms, yet isn’t dominated by any single industry. “That’s why we entered the recession so much later than everyone else, and we’ll be able to come out of it sooner,” says Duane Dankesreiter, VP of Research for the Dallas Regional Chamber.

Salt Lake ranks No. 5 on the list, as it did last year, thanks to its strong jobs market: its 4% unemployment rate (as of December, seasonally adjusted) is the 2nd-best in the nation. “Utah’s economy has really become much more diverse than a classic western economy focused on extractive natural resources, federal defense—the things we used to be very dependent on,” says Pam Perlich, a senior research economist at the University of Utah who specializes in regional economics and demographics. She points to growth in construction, residential and commercial real estate, and a burgeoning energy sector as lifting the region. Tourism, manufacturing, professional and business services, and information are also help driving the region’s growth. A new light rail system has also been a factor, luring both housing and jobs along its corridor.

Categories Economy, Narrative, Office Market

A Look at the Numbers Behind the Current Headlines About Job Creation

Job creation news made headlines a few weeks back touting that the United States had recovered all of the jobs that were lost during the great recession. In Arizona, however, we are still way behind our pre-recession levels. Over the next two weeks, we are going to try to tie jobs, the Phoenix office market, and Phoenix population growth all together to make sense of our market.  

For this week, let’s look at the Phoenix office market and my favorite topic–job growth:

–Job creation remains anemic. In Arizona, we are still a long way away from getting back to our pre-recession levels.

–The office market has bifurcated into two markets—Sales and Leasing. Large investor demand for class A properties has caused the market to compress cap rates, and created demand for the construction of new buildings. The leasing market, on the other hand, remains extremely challenging with all segments still over 20% vacant. A 20% vacancy is not a market where sustained lease rate increases will continue. 

–Absorption for Q1 2014 was very good, creating some justified hope that the market recovery will begin to accelerate.

–I am a realist and I want to see vacancies in the teens (in any class of building A, B or C) before I tell my landlord clients we are on the path to recovery.  

I remain very optimistic over the long term. Seven years into an office market with plus 20% vacancy is daunting. I am hopeful we can keep the year rolling and finally get back into the high teens at the end of this year or at worst case, in 2015.

Craig
602.954.3762
ccoppola@leearizona.com

 

Historical Phoenix Office Market Statistics 2
To see a larger image, click here.

Linneman Letter Page 5 Graph
To see a larger image, click here.

Unemployment Rate 03.14_Page_03 3

Ofc of Employment and Population Stats_Mar 2014 Report_Page_01 2
View the entire slideshow at:http://azstats.gov/pubs/labor/prslides.pdf

The Unemployment Puzzle: Where Have All the Workers Gone?

The U.S. unemployment rate is down, but rising numbers of Americans have dropped out of the labor force entirely

WSJ

By: GLENN HUBBARD
April 4, 2014

Jobs
The problem is not just a cyclical downturn. We need to tackle deep structural issues in the U.S. economy. Bloomberg News

A big puzzle looms over the U.S. economy: Friday’s jobs report tells us that the unemployment rate has fallen to 6.7% from a peak of 10% at the height of the Great Recession. But at the same time, only 63.2% of Americans 16 or older are participating in the labor force, which, while up a bit in March, is down substantially since 2000. As recently as the late 1990s, the U.S. was a nation in which employment, job creation and labor force participation went hand in hand. That is no longer the case.
 
What’s going on? Think of the labor market as a spring bash you’ve been throwing with great success for many years. You’ve sent out the invitations again, but this time the response is much less enthusiastic than at the same point in previous years.

One possibility is that you just need to beat the bushes more, using reminders of past fun as “stimulus” to get people’s attention. Another possibility is that interest has shifted away from your big party to other activities.

Economists are sorting out which of these scenarios best explains the slack numbers on labor-force participation—and offers the best hope of reversing them. Is the problem cyclical, so that, if we push for faster growth, workers will come back, as they have in the past with upturns in the business cycle? Or do deeper structural problems in the economy have to be fixed before we can expect any real progress? To the extent that problems are related to retirement or work disincentives that are either hard to change or created by policy, familiar monetary or fiscal policies may have little effect—a point getting too little attention in Washington.

Employment Is Recovering
Participation Is Down

The unemployment rate, the figure that dominates reporting on the economy, is the fraction of the labor force (those working or seeking work) that is unemployed. This rate has declined slowly since the end of the Great Recession. What hasn’t recovered over that same period is the labor force participation rate, which today stands roughly where it did in 1977.

Labor force participation rates increased from the mid-1960s through the 1990s, driven by more women entering the workforce, baby boomers entering prime working years in the 1970s and 1980s, and increasing pay for skilled laborers. But over the past decade, these trends have leveled off. At the same time, the participation rate has fallen, particularly in the aftermath of the recession.

In one view, this decline is just a temporary, cyclical result of the Great Recession. If so, we should expect workers to come back as the economy continues to expand. Some research supports this view. A 2013 study by economists at the Federal Reserve Bank of San Francisco found that states with bigger declines in employment saw bigger declines in labor-force participation. It also found a positive relationship between these variables in past recessions and recoveries.

But structural changes are plainly at work too, based in part on slower-moving demographic factors. A 2012 study by economists at the Federal Reserve Bank of Chicago estimated that about one-quarter of the decline in labor-force participation since the start of the Great Recession can be traced to retirements. Other economists have attributed about half of the drop to the aging of baby boomers.

Baby boomers can’t be the whole story, though, since the participation rate has declined for younger workers too. This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance. Globalization and technological change have also reduced employment and wage growth for low-skilled workers—which raises questions about whether current policy is focused enough on helping workers to achieve the skills necessary to work productively and earn decent incomes.

Figuring out which explanation best fits today’s labor market is important because the different narratives point to different possible solutions. To the extent that labor-force participation and job creation have a cyclical element, activist demand policies by the federal government may make sense. Does this mean that the Obama administration’s “targeted, timely and temporary” stimulus package was the right approach? Actually, no. Increasingly, it appears to have been a poor match for the severity of the downturn and the magnitude of the required boost.

After the Great Recession’s sharp decline in investment and employment, U.S. business probably needed a more curative jolt to restore confidence. A sustained infrastructure program, rather than a temporary one for “shovel-ready” projects, would have provided more reassurance of longer-term demand. And far-reaching tax reform could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth.

What we don’t know is whether the Obama’s administration’s activist policies failed to draw more Americans back to work because they were poorly executed or because they didn’t do enough to raise aggregate demand. A better designed activist fiscal policy would have made more headway in encouraging growth, but deeper factors behind the downward shift in labor force participation still remain.

The Federal Reserve also has used monetary policy, through aggressive “quantitative easing,” to combat the shock from the financial crisis. In assessing this move’s effect on the labor force, a key question again is whether the problem is best seen as cyclical or structural. If labor-force participation is down because of cyclical factors, keeping interest rates low has been a smart policy, even as unemployment falls—in fact, even if it continues to fall to very low levels to draw nonparticipants back into the labor force.

Research by economists at the Federal Reserve Board published in 2013 suggests that bringing Americans back to work in this way might succeed without sparking inflation—if low labor-force participation is largely a result of a conventional downturn in business activity. If the real problem lies in the rules of the game—that is, structural factors accounting for labor force participation—such a highly expansionary monetary policy ultimately runs the risk of igniting inflation.

As I see it, the policy response to our disturbing doldrums in the labor market has indeed struck the wrong balance. Whatever can be said for shorter-term measures to jump-start job creation and business activity, it seems clear by this late date that our problems are in no small part structural. What we need most urgently is to rethink the federal government’s wider role in the labor market. The importance of structural problems doesn’t imply that policy can play no role beyond conventional fiscal or monetary policy.

The fierce debate now going on in Washington about extending unemployment insurance and raising the minimum wage largely ignores these issues. Such policies may affect the incomes of some Americans, but they won’t do much to expand opportunity and bring more people back into the labor force. Sparking a broad-based return to the labor force demands a more ambitious agenda.

In the first place, we need to encourage low-wage workers and remove barriers to their lasting participation in the labor force. This encouragement is particularly important given the downward pressure on wages encountered by many low-skilled employees in the face of globalization and technological change. The Earned Income Tax Credit, which supplements the income of low-wage workers as they earn more, is supported by many conservatives and liberals alike. Expanding this program’s payments for single workers (that is, beyond workers with families)—or using an alternative low-wage subsidy—would create more powerful work incentives. Phasing out the support over a longer income range, so that it provides more help to those who succeed and advance and reduces the marginal tax rate on work as the support phases out, also makes sense. These changes would cost money, but they could easily be accommodated in a broad tax-reform package.

Another priority for bringing low-wage workers back into the labor force is reforming disability insurance, which is part of the Social Security system. Since changes in qualifications in the 1980s made it much easier to receive federal disability payments, the percentage of individuals reporting disabilities who are still working has dropped by half. For some, disability insurance has become an incentive to give up on work—but it doesn’t have to be this way. The program could be restructured to instead provide the employers of disabled employees with tax advantages for retraining them to remain on the job.

The Affordable Care Act, while giving some Americans access to health insurance for the first time, also creates certain disincentives for work. The law’s generous private insurance subsidies phase out as income rises. In a recent study that I co-wrote with John Cogan and Daniel Kessler of Stanford University, we estimate that the amount of the federal subsidy can decline by as much as 50 cents for each dollar of additional earnings. This implicit tax comes on top of existing income and payroll taxes, raising the effective marginal tax rate on earnings to as much as 80% to 100% for some middle-income families. A broader tax reform that gives a more uniform subsidy for health insurance and health spending would reduce this problem.

A second broad area of policy in need of structural reform is unemployment insurance. Unemployment insurance was originally designed to provide income to workers during temporary spells of joblessness. Longer spells of unemployment during the Great Recession have led to continued calls to extend these benefits. Such extensions certainly keep income support in place longer, but they also lengthen spells of unemployment, potentially making workers less attractive to employers going forward.

A better approach would be a policy pivot toward easing the return to work. A first step would be to complement traditional unemployment insurance with block grants to states to support training and workforce development through community colleges and vocational education. Congress could also create Personal Re-employment Accounts for individuals. These accounts would give lump sums to individuals who lose their jobs and make it likelier that they receive some support and training during long periods without unemployment. If such individuals find a job quickly, they could keep some of the money as a re-employment bonus. Advancing and updating skills are also important: Funds currently in other federal training programs could be repurposed to provide this pro-work support.

Finally, in response to the profound change in the demographics of today’s workforce, we really must consider eliminating the Social Security payroll tax on older workers. Today, older workers who delay retirement must keep paying Social Security taxes while receiving virtually no extra benefits—a strong incentive to stop working early. Getting rid of the payroll tax (currently 12.4% for Social Security) for older workers would remove this disincentive and increase employers’ demand for older workers because employers pay half the employees’ payroll tax.

In addition, Social Security reform should dispose of the “retirement earnings test,” which reduces benefits by about 50 cents on the dollar on earnings above $15,000 for individuals aged 62 to 65. This heavy tax directly discourages work. These pro-work reforms to Social Security wouldn’t be budget busters. Additional work by older Americans would produce income and Medicare taxes to offset much of the budget cost—while also slowing down the exit of workers from the economy.

None of the supply-side changes I’ve proposed would be easy to enact. They would require Democrats in Washington to confront the inadequacy of their stimulus policies to raise employment. And they would challenge many Republicans, who have focused their attention on economic growth, pure and simple, rather than on much-needed changes in federal labor policies. They will need to face up to the need for a more opportunity-oriented agenda for work, as Rep. Paul Ryan and Sen. Marco Rubio have argued, rather than simply opposing the extension of unemployment insurance or raising the minimum wage.

John Maynard Keynes once famously declared his fear that, at some point, much of humankind would have to cope with the problems of abundant leisure and little work. Perhaps. But we can no longer sit back and watch as growing numbers of Americans—not just the wealthy or the elderly—exit the labor force. This trend spells trouble for the nation’s economic and fiscal future. It is a bigger and less understood problem than we think, and it requires bolder policy action than we have contemplated so far.

Fewer Working Americans

For the entire article: http://online.wsj.com/news/article_email/SB10001424052702303532704579477380159260374-lMyQjAxMTA0MDAwNTEwNDUyWj

U.S. Job Growth Jumps, But Shrinking Labor Force A Blemish

Reuters 2

By: Lucia Mutikani
May 2, 2014

US Jobs 2
A woman looks at her smartphone as she attends the NYC Startup Job Fair in New York, April 11, 2014.
CREDIT: REUTERS/CARLO ALLEGRI

US Jobs 2 3
A help wanted sign is posted on the door of a gas station in Encinitas, California in this September 6, 2013 file photo.
CREDIT: REUTERS/MIKE BLAKE/FILES


(Reuters) – U.S. employers hired workers at the fastest clip in more than two years in April, pointing to a rebound in economic growth after a dreadful winter and keeping the Federal Reserve on track to end bond purchases this year.

The brightening outlook was, however, tempered somewhat by a sharp increase in the number of people dropping out of the labor force, which pushed the unemployment rate to a 5-1/2-year low of 6.3 percent. Wage growth also was stagnant.

Nonfarm payrolls surged 288,000 last month, the Labor Department said on Friday. That was largest gain since January 2012 and beat economists’ expectations for only a 210,000 rise.

“It lends significant legitimacy to the positive tone in the wide array of post-February economic reports, which have all been consistently pointing to a significant pick-up in economic growth momentum this quarter,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

March and February’s data was revised to show 36,000 more jobs than previously reported.

U.S. stocks briefly rallied on the report, which was later eclipsed by rising tensions in Ukraine. Stocks ended lower, while safe-haven bids pushed the yield in the 30-year U.S. government bond to its lowest level in more than 10 months.

The dollar was flat against a basket of currencies.

About 806,000 people dropped out of the labor force in April, unwinding the previous months’ gains. That helped to push down the unemployment rate 0.4 percentage point to its lowest level since in September 2008.

The labor force participation rate, or the share of working-age Americans who are employed or unemployed but looking for a job, also fell four-tenths of a percentage point to 62.8 percent last month, slipping back to a 36-year low touched in December.

Overall, however, the data suggested the economy was gathering strength and led investors to pull forward their bets on when the Fed will start to raise interest rates.

The strong payrolls growth added to upbeat data such as consumer spending and industrial production in suggesting that sputtering growth in the first quarter was an aberration, weighed down by an unusually cold and disruptive winter.

The Fed on Wednesday shrugged off the dismal first-quarter performance. The U.S. central bank, which announced further reductions to the amount of money it is pumping into the economy through monthly bond purchases, said indications were that “growth in economic activity has picked up recently.”

“It also matches well with the Fed’s expectations for the labor market, excluding the sharp unemployment rate drop, and likely means more $10 billion dollar reductions in monthly asset purchases at future meetings,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

LABOR MARKET IMPROVING

Economists expect second-quarter gross domestic product to top a 3 percent pace. Last month’s drop in the labor force could have been driven by some of the 1.35 million people who lost their longer-term unemployment benefits at the end of last year.

Since they are no longer receiving unemployment benefits they have little incentive to continue looking for work as required by law. Part of the decline in participation in the labor market also reflects changing demographics, as well as people going on disability while waiting to reach retirement.

“Baby boomers are retiring and the various government benefits including disability are contributing to the drop in the participation rate,” said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.

Still there is little doubt the labor market is strengthening. A broad measure of unemployment, which includes people who want to work but have stopped looking and those working only part time but who want more work, fell to a 20-year low of 12.3 percent in April. It was at 12.7 percent in March.

In addition, the number of people who have been unemployed for more than six months saw its biggest decline since October 2011 and the average duration of unemployment fell to 35.1 weeks from 35.6 weeks in March.

The short-term jobless rate hit a new cycle-low of 4.1 percent. Employment gains in April were broad-based, with the private sector adding 273,000 jobs and government payrolls rising 15,000. Manufacturing employment increased 12,000 after rising 7,000 in March.

Construction payrolls gained 32,000 after increasing 17,000 in March. The hiring trend could slow in the months ahead as residential construction loses some steam.

Despite the strong gains, average hourly earnings were flat in April, pointing to lack of wage pressure and still ample slack in the economy.

“There is just no sign of any broad-based wage pressure,” said Josh Feinman, chief global economist at Deutsche Asset & Wealth Management in New York. “There is still slack in the labor market and with labor costs still dead in the water, the Fed is probably not going to have to rush (to raise rates).”

The length of the workweek held steady at 34.5 hours last month after bouncing back in March from its winter-depressed levels.