INVESTMENT OVERVIEW
Terry Lavery
Investment Specialist
January 28, 2016
The Tucson Real Estate Investment market for the beginning of 2016 could not have started the new year in any worse way. The stock market, which is a pulse of the nation as to its near term future, opened the year with over 75 percent of available sessions closing at losses. The market loss year-to-date is down 10 percent. What would appear to be more disposable income for consumers with the drop in gas prices has now created a commodity crisis worldwide with oil- based economies dumping oil to feed their population. Oil is down 70 percent since 2014 with more weakness still apparent. China, now the world’s largest economy, has lead the way with a projected economic down turn for the first time in recent history. This has led to a global sell-off of equities as investors flock to the security of U.S. Treasuries. The 10-year Treasury note has fallen 20 basis points in the past month and is hovering around 2.0 percent. Investors are paying a premium for the “safety” of long-term Treasuries, reflecting soft economic growth and weak inflation. The 30-year Treasury note over the last month has fallen approximately 14 basis points and settled around 2.77 percent. The flip side to all this, is that real estate lending rates are actually lower now than when the Fed raised interest rates at its Board Policy Meeting in December. That said, the news regarding the economy is not encouraging.
If you chose to swim into a hurricane, be prepared for waves and damages. In the past overviews, there were references made to “the rising tide lifts all boats” as it related to real estate investing. A strong increase in home building caused a spurt in commercial retail investments as a result of families needing food and services in newly created neighborhoods. Today, the man with the most money, Warren Buffet, is holding on to his investments FOREVER. Warren’s investments are in hard assets, insurance underwriting and service industries with high returns. He owns real estate with each company he acquires which makes the bottom line more profitable. He also stated that “it’s only when the tide goes out that you discover who’s been swimming naked”
We need to focus on what we know, which is the Tucson market. Is Southern Arizona the worst place to find a job in all of Arizona or are we one of the go to hot spots for Millennials? Are your investments following the area in sustaining growth, creating jobs, raising household income and living standards in Tucson? The answer to the question of growth is as much political as much as it is economic. Nine years of slow to no growth has not hampered the Central Business District (Downtown) nor our recent new road construction and our bet on the modern street car. The cranes have been on our city horizon over the past five years. Overall, the investments in Tucson have revived the city and surrounding area.
Why invest in Tucson real estate? For the buyer and investor, now it appears that values are returning. In other words, we are improving from our lows. For example, Industrial real estate has 10-year lows in vacancy. Office rents are just beginning to increase. For certain real estate product types (homes under $300,000, private student housing on campus, apartments, Triple A investments) it is a seller’s market as cap rates are at record lows (great for sellers). For investors who wish to dispose of assets, it may be your last chance to trade before cap rates begin to rise or the other shoe drops and we see a potential return of 2008.
Apartments, which have been leading the investment market, are now starting to see cap rates at 5.6 to 5.75 percent on recent transactions (Pantano Park, Woodridge). Unheard of, but in a low return market, investors are chasing yield. Also, there has been little development because employment/economic growth is stagnant and there is a lack of quality apartment sites; therefore, occupancy is in the 90 to 91 percent range for older product and any new product (not out in the sticks) has leased up very well. The biggest multi-family transaction that closed last year was the FHR portfolio to MC Companies for $66,700,000 (8 communities, 1,576 units).
In conclusion, real estate investing advantages have been location, location, and location. Another advantage is income or appreciation or both during holding periods. Real estate offers the depreciation for tax shelters for your income. And the final advantage is equity buildup each and every time you pay your mortgage. Today, critical choice (buy, hold, or sell) has risk which vastly increases when you do not know what you’re doing. If you have been a holder of real estate, now is probably the time to harvest your gains before cap rates rise as they usually do when interest rates increase. If you’ve been looking at buying a building for your business, now may be the time to buy as Tucson’s real estate economy is at its healthiest since 2008, values are rising and interest rates are at near record lows.