McKinney Economic Update | 1Q2016
“National economic momentum fell during the fourth quarter of last year, and was buffered by global economic slowdown and financial volatility”
Damian McKinney, CEO of McKinney Capital & Advisory, shares his perspective on market conditions.
Bridging the Gap: Q4 2015 & Q1 2016
“National economic momentum fell during the fourth quarter of last year, and was buffered by global economic slowdown and financial volatility,” according to the National Association of Realtors. Much of the current weakness in the U.S. economy is still concentrated in mining, manufacturing, and trade industries, which have been held lower by the collapse in energy prices, slow global growth and a strengthened value of the U.S. dollar.
While State budgets tightened on a year over year adjustment, Federal spending (also in a budget tightening mode) was more growth oriented. According to a study performed by National Association of Realtors regarding market performance in Q4 2015, federal government spending increased by approximately 2.7 percent, offsetting the 0.6 percent cut in spending incurred at the local and state government level. Consumer spending on services increased by approximately 2 percent annually. Business investments declined by approximately 1.8 percent annually, decreasing spending in both equipment and commercial real estate.
Primary Commercial Real Estate Market Performance
According to a study performed by National Association of Realtors regarding market performance in Q4 2015, Construction has grown across all property types, but the gap between demand and supply has put pressure on availability. In contrast, the industrial sector recorded stronger overall performance by rising demand and declining vacancies. Demand for retail properties has started to grow in response to rising employment and consumer confidence. Retail tenants are expanding, and developers are increasing construction as a result. Q1 2016 appeared to be strong in industrial and high tech markets where demand is outpacing supply.
McKinney’s clients in the industrial and R&D sectors have relied on us to seek off-market opportunities in numerous locations across the country, in order to solve expansion needs. McKinney recently advised a client seeking a short-term warehouse in a low vacancy market. We informed the client of our change in strategy to pursue options in yet another creative approach, to which they responded, “we need to continue and now try plan Z”, implying we have exhausted plans A through Y. For clients seeking anything short of a long-term market rate commitment, creative off-market solutions are the means to bridge the gap between tenant/buyer budgets and landlord/seller expectations.
Secondary & Tertiary Commercial Real Estate Market Performance
Leasing volume has sustained steady growth compared to prior quarter. Leasing rates advanced at a steady pace. Tenant demand remained strongest in the sub-5,000 square-foot segment. Office vacancies continued to decline to a national average of approximately 14 percent. Industrial availability decreased on a year over year basis, by approximately 20 basis points. Industrial infill markets near city center activities continue to reposition properties to their highest and best uses by converting assets from industrial to office, lifestyle, retail and, in some cases, multi-family, where zoning is permitted.
In Q1 2016, McKinney was involved in a conversion of what was once a Department of Defense building in the 1960’s, which was then converted to a retail book depository in the 1980’s, and is now, in 2016, a Vocational High School. This project is an example of how clients can reposition assets into their newest and highest best uses.
Given the global financial market’s uncertainty, commercial real estate remains an attractive alternative for investors. Primary markets have experienced rapid growth over a five year period, while secondary and tertiary market increases have occurred over a two-three year period.
McKinney’s experience over the past year coincides with the aforementioned findings. McKinney’s broad reach across the United States and worldwide is facing a change in type of demand. Our client base is now seeking more investment and user transactions ranging from primary U.S. markets, to secondary markets within countries including U.S., China, Czech Republic and Uruguay.
Projecting ahead for 2016, GDP annual rate of growth is expected to be moderate at best, following a tumultuous Q1 financial market. Economic growth is expected to increase in the second half of 2016, and unemployment is projected to further decline by end of 2016.
Source: National Association of Realtors, www.realtor.org/reports/commercial-real-estate-outlook
Damian McKinney, Founder & CEO of McKinney Capital & Advisory, has 35 years of experience in national commercial real estate brokerage and investment. He has been recognized as one of the nation’s preeminent corporate services advisors since 1979. McKinney Capital & Advisory is a full-service real estate firm that focuses on the representation of clients in order to optimize the value of their real estate assets. McKinney represents clients worldwide in all stages of acquisition, disposition, and financing of commercial real estate. To learn more about our advisory services, call +1 858 519 3240.