Terry Lavery CCIM, Investment Specialist at Tucson Realty & Trust Co. offers perspective on 2014 Tucson Real Estate Investment Market.
The Tucson Real Estate Investment market in 2014 will be quite a challenge. The interest rates for both the borrower and the investors are going to increase and it is simply a question of when and how much. Long-forgotten returns on savings deposit and money market funds are also projected to increase, possibly to their pre-recession level. These safe investments could triple if returns revert to 2008 levels. Big banks are locking in long-term, low-rate deposits to fuel lending at fatter margins and hefty bottom line returns. Bank stocks which out-performed the market in 2013 are still viewed as reasonably priced and could spark another run up in bank stock pricing. This is all good news for the banks, their holdings, their loans and their stockholders. Wall Street is in the comfort zone and the only clouds on the horizon are possibly government over reaction to tapering a recession replay with an unprepared central bank, or if the Dow gets too frothy above 17,000 and a major pull back occurs.
The report cards are in for REITs and the financial performance in 2013. The losers were Mortgage REITs and Residential REITs. Office and Industrial REITs barely posted a one percent return which is equal to a current six-month CD rate. The winners were Hotel REITs (23 percent increase), Holding Companies/Developers REITs (31.5 percent increase) and Real Estate Service REITs. (29 percent increase). REITs are considered the smartest in the real estate investment world and half of all had winning 2013 positions.
Just when you thought the Central bank had its act together, the Congress House Ways and Means Committee along with the Senate Finance Committee expressed a desire to “overhaul” the tax system as it relates to real estate. At risk are the following: leasehold improvements, 1031 like kind exchanges, depreciation, bonus depreciation and carried interest. Currently, real estate is in a five-year recovery cycle (not necessarily in Tucson!) and near-term future tax changes could be devastating to small investors and future values as it was in 1987, which led to a collapse of the real estate market for five years and introduced the RTC (Resolution Trust Corporation) to solve the meltdown. Those were five brutal years. Banks again are being requested to hold more capital which curtails the flow cash into all types of real estate. Construction and real estate are fundamental building blocks to the 2014 economic recovery. Tax reform is ill advised at this time.
What lies ahead for the investor with rising interest rates and a proposed government tax overhaul is uncertain for 2014. This uncertainty dampens an improving economy because it threatens the foundation of the recovery. Currently, the Tucson Office Development market is stuck unless it is within the Tucson central business district or LEED certified. Office vacancy is still around 18 percent. This is not good for older buildings with poor efficiency and poor quality work environments. Multi-Family is pausing to catch its breath after leading the pack for four straight years with cap rates at or near all-time lows. Too frothy for now. Land prices will improve due to limited supply in hot submarkets and perhaps the best play in investments is in residential production land. Industrial real estate, though slow, will follow new area job creation and an improving residential real estate market. Pre-Fabrication of building product will speed up construction and improve safety, which benefits build-to-suit construction.
In conclusion, most quality investments suffer from low cap rates from an investor’s purchasing standpoint. The best bets are in residential production housing as existing building lots are almost non-existent. That said, the Tucson Investment real estate with the established base in education, medical services, mining, aerospace, our climate, and the ever-aging baby boomers relocating after the worst winter in 30 years, will be fine with another slow year of economic recovery. It will take a lot of small positive economic signals to create upside potential.