Painting the big real estate picture

Is the economic recovery already over? Are we heading into another recession? Experts posed these questions to the crowd during a panel discussion about real estate finance hosted by the W. P. Carey School of Business and the ASU Real Estate Council.

Is the economic recovery already over? Are we heading into another recession? Experts posed these questions to the crowd during a panel discussion about real estate finance hosted by the W. P. Carey School of Business and the ASU Real Estate Council.

David Lynn, Executive Vice President and Chief Investment Strategist for Cole Real Estate Investments and moderator of the panel, was optimistic.

“There's been a huge drop in fortunes in the economy and the real estate markets over the last five years and it is beginning to come back and offering a lot of promise for the investors,” he said.

But Jim Mahoney, a Senior Managing Director at Trammell Crow Company, believes we’re going to see a measurable step backwards in the absorption of specific types of commercial real estate, specifically office and industrial space. Mahoney, who manages the Development and Investment Group for Trammell Crow Company in the state of Arizona, asked the audience “is that what a recovery looks like? I’m hoping that’s an aberration, that this wasn’t the shortest recovery of all time.”

"Commercial Real Estate Capital Markets: From Armageddon to the Promised Land" was the first of a series of programs hosted by the ASU Real Estate Council designed to bring together the professional and academic real estate communities to share knowledge and insights. The next panel, on November 19, focuses on the golf industry.

The good news - lenders are lending again

Mahoney is not predicting another recession but he said it certainly doesn’t feel like a robust recovery.

“If we were a sailboat we’d be running our engines because we don’t have enough wind in our sails,” he said later by phone.

While Mahoney said consumer spending is up and there’s been a correction in the housing market locally, he called the recovery anemic. The driving factor, he said, is job growth. Traditionally the job growth rate is 4 to 6 percent, Mahoney said, currently we’re seeing a 2 percent rate.

The good news is that lenders are lending again, said Keaton Merrell, Principal at Legacy Capital Advisors, for all product types. He said lending varies by market and in Phoenix the challenge is getting the larger institutional lenders to see the Valley as a valuable investment.

Mahoney agreed that in Phoenix investors need to be more risk-minded. Investments that fit the pro forma are leading capital to other major metropolitan areas around the country.

“We’d like to invest every dollar in about five markets, Phoenix isn’t one of them,” he said.

Mahoney said that when institutional lenders decide where they want to put their money, Phoenix isn’t on their map. By the time these lenders see the potential in the Phoenix market, they’re too late and have missed the opportunity, he said.

“Institutional capital always comes late to the party,” Mahoney said, although this creates a window of opportunity for private lenders.

Merrell agreed saying, “We’re going to see a lot of private equity deals done in the next two years.”

Thomas W. Roberts, Executive Vice President and Head of Real Estate Investments for Cole Real Estate Investments said cap rates are nearing historic lows. Institutional capital is currently following the energy sector in Houston and the tech sector in Seattle and the Bay Area, Mahoney said. The challenge is educating these lenders about Phoenix. Many lenders don’t know where Phoenix falls among the other major markets in the country.

Brain City versus Muscle City

There’s been a buzz lately around what cities are brain cities and which are muscle cities, and what that means for long term investments, Mahoney said. Brain cities are those that are home to the headquarters of major companies, where all the ideas are born and decisions are made: New York City, San Francisco, Los Angeles and Houston, for example.

Muscle cities are those that do the work, manufacturing or assembly: Pittsburgh and Cleveland, Mahoney cited as examples.

“Phoenix is a muscle city,” he said.

An example, Mahoney said, is American Express. They employ more workers in Phoenix than anywhere else but the brain of their operation is in New York City. Intel is another example: they have large manufacturing facilities in Chandler yet their brain is in Silicon Valley.

“The brain needs its muscle, but it’s never really very loyal to it,” Mahoney said, meaning those companies will probably always have an investment in the location of their brain but might not always have a presence in the place where they get their muscle. That’s something that concerns capital investors, he added.

Phoenix needs to work on its brand, Mahoney said, to change this perception.

Adapting in a Tough Market

In addition to location, lenders are particular about what type of commercial real estate project they choose to invest in, whether it’s residential or retail, office or industrial.

Merrell puts multi-family housing developments above all other product types when it comes to what lenders are currently putting their dollars toward. Office and retail are at the bottom of the ladder, he said.

“Multi-family is still the belle of the ball,” Merrell said.

Merrell predicted retail would be the last to make a full recovery.

The roller coaster ride of speed ups and slowdowns has affected all types of real estate and each type adapts differently to endure.