VOL. 126 | NO. 237 | Tuesday, December 6, 2011
ULI 2012 Outlook: CRE Industry Slightly Better
By Sarah Baker
Next year will be slightly better for commercial real estate, but it’ll come at the cost of a shrunken industry.
That was the message an at-capacity room of bankers, investors and real estate professionals heard Tuesday, Dec. 6, at the Urban Land Institute’s Real Estate Outlook for the Mid-South, where attendees learned about facing a “long grind,” compared with last year’s theme, “an era of less.”
“We cannot expect to make money the way we did a few years ago,” said guest speaker Jonathan Miller during his presentation of Emerging Trends in Real Estate 2012, a report that draws on surveys of real estate executives and market experts nationwide. “Improvement will get better, but we think the next five to 10 years are going to be a long grind.”
That’s because there are various obstacles to overcome to see real estate rebound as a whole, including global jobs arbitrage, financial morass, productivity costs, personal and governmental debt loads and the construction slowdown.
For Memphis, success relies on tying into the global economy, Miller said, adding that includes linking to Europe and pathway cities such as Chicago, Atlanta and Dallas.
“I grew up in the ’70s, and it used to be that if you were near interstate intersections, that was the thing,” Miller said. “Before that, it was the river. Now, it’s airports and ports.”
Miller said Memphis has great prospects to be an industrial hub of profound significance – with FedEx Corp. and railroad pathways – but the big focus nationwide is on East Coast and Gulf Coast ports.
Also working against Memphis’ favor: the unemployment level, which likely won’t budge until after the 2012 elections, said Dr. John Gnuschke, director of the Sparks Bureau of Business and Economic Research and co-director of the Center for Real Estate at the University of Memphis.
Since Memphis has a large impoverished population – plagued with workers who are frequently in and out of work and are working at low wages – the city has a lot of people who don’t show up in its unemployment rate.
“In good times, we know that unemployment rates run here at 6 percent,” Gnuschke said. “They don’t run 3 or 4 (percent). Now they’re at 10 (percent).”
He noted Nashville’s unemployment rate currently stands at about 7.8 percent.
The most important thing happening in Memphis right now, Gnuschke said, is low gas prices. This is a “pay raise” for every family in the community because it stimulates the market like no other single factor can.
“We desperately need to keep gas prices low,” Gnuschke said. “We’re less dense and more spread out than we need to be, but that’s our growth pattern and it’ll continue to happen.”
Memphis has about 500,000 workers in the workplace, Gnuschke said. In the last 10 years, the city has netted no new jobs.
Until Memphis sees an employment increase, CRE fundamentals won’t improve much in the near future, said Cary Whitehead of Boyle Investment Co., who tackled the investment funds category of the panel discussion, following Miller’s national and Gnuschke’s regional outlook.
In addition to Memphis’ high unemployment levels, investors are looking at gateway cities, Whitehead said. After that, investors will begin looking at tertiary cities such as Nashville and Birmingham, part of the reason Boyle established its Mid-South Capital Fund I LLC in late 2010, targeting up to $130 million over eight years.
“Today, we’re faced with a two-tier investment market – the A and B properties, there’s plenty of demand for it,” Whitehead said. “Buyers are a little more careful in their underwriting, but there are plenty of investment opportunities. Below B, there are essentially no purchasers.”
On the hotel front, “demand is in the driver’s seat,” meaning room occupiers can define what they’re going to pay for a hotel room, thanks to sites like Travelocity and Expedia commoditizing the industry, said McLean Wilson of Kemmons Wilson Cos.
Generating the best comeback is the East Memphis submarket, Wilson said, since a hotel’s success relies on a good mix of leisure and business.
Citing unsold inventories like the Chisca, French Quarter Inn and Clarion hotels, “Memphis has a great market for some of them, not all of them,” Wilson said. “It’s going to come down to who has the money.”
Meanwhile, the multifamily sector is poised for the best year in the past decade, due to unemployment, kids staying at home longer and the crippled housing market, said Jason Wexler of Henry Turley Co.
“No one’s moving,” Wexler said. “That makes for low turnover, low leasing costs – low operational factors.”
Parts of those gains in operations are linked to little or no new construction coming online. Next year will yield anywhere from 400 to 500 new units in the Memphis area, Wexler said.
“It’s really difficult to accumulate property at a price where you can actually develop something,” he said. “ULI has a big push for historic reuse, but the financial tools and incentives that we provide over the long term are not geared toward making that successful.”
Building on the topic of financing, Kemp Conrad of Cushman & Wakefield/Commercial Advisors LLC and a Memphis City Council member, said Memphis is entering 2012 with a $40 million hole because of changes that were not made this past year.
“Regardless if you’re Republican or Democrat, black or white, rich or poor, government does not live by the same rules as everyone else,” Conrad said. “You can look at the city of Detroit and see what happens when expenses get out of control.”