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Regional vice presidents' report: real estate and the economy in 1989.

Regional Vice Presidents' Report Real Estate and the Economy in 1989

Richard Muhlebach, Region 12: There is no doubt that developers with existing management departments in the Northwest are going after key outside management accounts. Smaller developers are starting management departments for in-house management. In addition, more developers are trying to retain management of properties they are developing, especially as joint-venture partners with institutional developers.

In general, I think that this trend is good for the industry because these developers are able to provide some services not found at every management company, as well as some job opportunities.

On the other hand, the entry of more developers in the market presents more competition for fee management companies. Many developers have greater regional or national recognition than local management companies. And for the institutional asset manager in Boston or New York, selecting a nationally known company as a manager is a safe decision. If something goes wrong, the institutional manager has a stronger position to defend than if he or she had chosen a less-well-known local management firm.

Malcolm Bates, Region 3: We see much the same thing on the East Coast. With the slowdown in construction, developers are looking for new sources of revenues. In our area, developers are making less effort to get outside management accounts, but they are retaining management of the properties they build. They used to hire fee management firms. Now many developers are keeping management of the larger properties and hiring fee managers only for the smaller ones.

Dale Johnson, Region 4: Developers are also active in management in the Southeast. They have been managing their own commercial properties for quite a while. The shift has come in developers finally realizing that management is more than a necessary evil. Many developers in Atlanta are becoming quite active in soliciting third-party management business. Some developers are hiring people to do nothing but solicit management contracts. This increased involvement has prompted concern among fee managers in our area.

Irma Schretter, Region 1: In the Northeast, the slowdown in development over the last year is creating the same sort of situation. Developers have found that property management is a good way to cover their overhead until they can get back into development. In the Boston area, developers are very aggressively solicting accounts they would not normally go after even seeking contracts for mid-sized residential properties with smaller fees.

Arthur Lilley, Region 7: In Texas, developers are establishing management departments and seeking fee management accounts to increase their cash flow and to retain their best people on the payroll. In the San Antonio area, the USAA insurance company, which is the largest independent insurer in the United States, has begun building a large in-house staff to manage their real estate investment trusts. They now employ at least two CPM members at their headquarters.

Muhlebach: One of the positive outgrowths that may result from more developer involvement in property management is an increase in management fees. Developers are accustomed to generating large fees, so they are not likely to try to lowball bids to get business.

Thomas Hirsch, Region 9: In large part, Region 9 developers have not been entering the fee management business in most cities. There is one notable exception in the Minneapolis area, where a major developer is now managing several condominium homeowners' associations.

What are property managers going to have to do to compete successfully with these developers? Muhlebach: Property managers are going to have to provide a higher level of service. A local manager does not have the name recognition of a Trammel Crow or a Gerald Hines, so he or she will have to provide better, more personalized service to compete.

Local managers will also benefit from finding a market niche-mid-sized office buildings, large residential properties - and concentrating their management efforts there. The other alternative is to go to the low end of the service spectrum and compete by offering lower fees.

Ken Goodacre, Region 8: Managers will also need to have greater flexibility to compete with developers managing their own properties as well as those for a fee. Many developers have their own in-house management systems that do not adapt easily to individual clients reporting requirements. By being flexible enough to meet these client needs, fee managers can develop a niche for themselves.

Ben Larsen, Canada West: This same situation of developer involvement has been happening in western Canada for some time. At first most of these corporations did not hire CPM members, but IREM Canada has worked to increase our visibility so that today, employment ads stress that applicants must be CPM members.

Harry Sweeney, Canada East: Personally, I do not consider increased developer involvement a negative thing for fee managers. As developers expand and build more properties, it will simply open up more opportunities for managers.

Do you see a decline in professionalism among these developer/managers?

Bates: Quite the contrary. Many of the developers we see entering management in the Southeast were active in syndication until the tax law changed. Now they are into management. But they are very professional because of their strong financial orientation.

Johnson: I agree that these developer/ managers are professional. One of the problems we are seeing for developers is that they are accustomed to having all the power to make decisions for their properties. As third-party managers, they are having trouble adjusting to asking an owner before acting.

It will be interesting to see how many developers stay in property management once they recognize these constraints. Yes, they will be earning the fees, but they do not have the control they had when it is their own property.

During the recent presidential election, the quality of education for today's youth received a great deal of national coverage. How do you feel that this lack of a well-educated labor pool is influencing the management of real estate?

Curt Kirby, Region 2: In the Northeast, entry-level positions are becoming difficult to fill for all businesses. In Philadelphia and Pittsburgh, for example, companies are routinely offering bonuses for employees recommending successful applicants for entry-level secretarial positions.

Schretter: This same labor shortage has been a problem in our area for some time. We have had a hard time finding lower-level maintenance and janitorial staff. Entry-level salaries have had to increase to keep up with competing job markets. You can try to solve the problem by increasing wages, but there is a limit, especially on smaller properties.

When we find qualified maintenance personnel, we try to avoid costly employee turnover by providing benefits and training programs, at least to the extent of the available cash flow.

Bates: In Region 3, our problem is not so much a lack of education among the work force, but a general lack of people. In Virginia, our unemployment rates are so low that we literally cannot fill jobs. Of course, this situation has also forced salaries up.

Lilley: In South Texas, along the Rio Grande, it is extremely difficult to find qualified maintenance personnel, especially on South Padre Island. Unemployment is very high in this area, but much of it is unskilled labor.

Muhlebach: As a result of changing demographics, we have found fewer applicants in their early 20s available for entry-level jobs. As a result, we are hiring more older applicants for part-time positions. At the same time, owners and tenants, especially in commercial buildings where operating costs are passed on directly to tenants, are realizing that you need to pay more than minimum wage to get the job done properly.

Neil Ewing, Region 10: The changes in agricultural employment have affected our region, and we are not experiencing the low unemployment rates of more urban areas.

However, this displacement of workers from the agricultural industries has provided a pool of multiskilled individuals who are migrating to the mid-western cities. While these people may lack advanced formal education, they are usually quite self-sufficient and have basic work skills and a strong sense of honesty.

Michael Simmons, Region 2: In southern New Jersey, we are facing stiff competition from the casino gaming industry in Atlantic City for employees. Some casinos are offering $10 an hour with free parking and hot lunches for entry-level employees, No property can match that.

Are housing costs a factor in the difficulty of finding lower-level employees in the Northeast?

Schretter: Absolutely. In the Boston area, rents have continued to rise, thus limiting the number of available lower-level employees. Employment packages frequently include a free apartment.

Lilley: Texas resort areas are suffering labor shortages in cleaning and maintenance crews. These low-paid employees cannot afford to live near the resort properties and are facing long, expensive commuting problems. Workers cannot justify traveling such long distances for minimum wage.

New immigration laws have also reduced the number of minimum-wage workers. Many employers, especially in the construction field, are still trying to beat the system by employing "wet-backs." So about once a week, the INS people come through and pick up illegal immigrants.

Robert Britigan, Region 6: Like the states in Region 10, our part of the Mid-west does not have a labor shortage, but finding qualified part-time help is still difficult.

We have come to rely on temporary help agencies to do our initial screening for us. This saves us time because they do reference checks and skills testing for us. As a result, we now use more temporaries for entry-level positions in clerical and semi-skilled maintenance jobs, almost permanent temporaries in some cases. In addition, because you can change the employees you request, it is easier to find an employee with a special skill you may need for only a short time. Surcharge costs vary, but because these are mostly entry-level jobs, salaries are not large amounts.

Kirby: I think that the area of training entry-level and maintenance personnel is one area in which BOMA has done an excellent job. IREM concentrates more on educating the overall manager.

How have vacancy rates changed in your region over the last year?

Bates: In Region 3: We are seeing vacancy rates creep up, even though they have been high for the last two years in the Richmond and Tidewater areas of Virginia. Currently office vacancies are between 15 and 17 percent.

Washington, D.C. has always been strong, but now we are seeing weakness there, especially in the suburbs. The downtown office market in Washington is running about 8 percent vacant. Multifamily remains very strong in Washington and in Virginia.

Muhlebach: In the Northwest, the vacancy factors are still coming down, although they are still in the mid-teens. However, it is important to keep in mind that vacancy rates are not the only indication of a healthy market.

The factor that is not being reported is effective rents. Management may be able to get vacancies below 10 percent, but if the pro forma rents are $25 per square foot, and actual rents are only $15, it will be a long time before this building breaks even.

Ewing: In Region 10, we are seeing vacancy rates come down in all categories - multifamily, retail, and office. And our rental rates are comparable with a year ago. Our region does not have any major metropolitan hot spots that were heavily overbuilt, so the total square footage to absorb has not been as high.

Lilley: In Region 7, we are seeing a reverse of conditions a few years ago. Vacancies are rising in the suburban office markets and decreasing in downtown areas. In the three major Texas metropolitan areas, downtown office space is averaging 22-percent vacancy, while suburban areas, office vacancies are running as high as 44 percent. And we do not see much hope for improvement in the next two or three years, although Houston has indications that it is starting on the upswing.

Apartment overbuilt conditions are leveling off. This has been caused by almost no new apartment construction, which has allowed past vacancies to be absorbed by normal population growth. However, apartment rents are still too low to allow owners to make a reasonable return on their investment.

Lawrence Jacimore, Region 5: In our area, we are now negotiating contract rental rates that are in line with building pro formas. What does not appear are the concessions offered to get that contract. So effective rents are much lower. Multifamily vacancies are beginning to firm up throughout the region.

Johnson: Office building vacancies in the Atlanta area are averaging 20 percent, with strong concessions. The Southeast had been fairly strong, but now we are beginning to feel some of the vacancy pressures faced in other areas.

Multifamily vacancies are also on the rise. Atlanta has historically had between 6 and 8 percent apartment vacancies; now many properties are reporting 10 percent vacant. Vacancies in southern Florida are in the 8-percent range.

It is expensive to get tenants in and to keep them in. And with the concessions being offered, tenants tend to move from one property to another

Sweeney: In Canada we face the reverse side of your overbuilding. Multifamily rent controls have shut off construction so completely that most apartments have vacancies of only 2 to 3 percent. High land prices in the Toronto area have also contributed to a decline in both single-family and multifamily construction.

Hirsch: It is difficult to generalize in Region 9 regarding vacancies. The strongest sector in office space is clearly the Chicago market, with vacancies in the 11-to-17-percent range downtown, depending on whose study you read, and approximately 18 to 25 percent in suburban markets. While these figures may seem high, they are clearly a reduction of a couple of points from last year, combined with a definite increase in lease rates over last year.

The expected sale of the Sears Tower, the world's tallest building, could have a dramatic effect on the Chicago office market. With 3.6 million rentable square feet and a current 98-percent occupancy, the building could sell in the $1 billion range. Sears may relocate many of its 8,700 employees, which would mean a significant increase in vacant prime Chicago office space.

The downtown Minneapolis office market has bounced around a bit, with the present vacancy at approximately 17 percent. Downtown St. Paul's vacancy is in the 15-percent range. Suburban office vacancies in the Twin Cities are in the 21-percent range overall. These figures all reflect a slight decrease from last year. Milwaukee downtown office vacancies are around 20 percent, depending on the source, but total occupied square footage has jumped significantly. Madison's office vacancies range from under 10 percent in Class A buildings to 15 to 20 percent in Class B and 30 percent or more in Class C buildings.

In the greater Chicago area, apartment vacancies are generally in the 5-percent range, down slightly overall from last year. The Minneapolis/St. Paul apartment vacancy rate is in the 6-to-6.5-percent range, up one-half a point from last year. Milwaukee's apartment vacancy rate has not changed materially from last year, but if anything is slightly improved to a 5-to-8-percent range. Madison's apartment vacancies are down to approximately 7 percent this year from 10 percent a year ago. In central and downstate Illinois, apartment markets generally have been strong with particular strength in Peoria, where dramatic rent increases have been implemented.

Jo Anne Corbitt, Region 13: In the upper South, while multifamily vacancies are still around 15 percent, we are offering less reduced rent and concessions than a year ago. In office buildings we still have a 20-to-25-percent vacancy rate in Nashville.

Regional malls in the region are strong, and a new regional mall is under construction in the Nashville area. Strip centers are suffering with very low rents and low ratings of tenants. The construction of strip centers continues, and the concessions they are offering established tenants are high. It is difficult for some tenants to reject such deals, even though they understand the ramifications of breaking their leases. They are accepting the risk for the bargain.

Coy Herring, Region 11: Our office market in California is very strong with vacancies somewhat higher in suburban areas. In Hawaii, vacancies are fairly stable at 5 percent because there is only so much available land to build on.

Our office building market has been helped by the sizable presence of foreign investors in the region. While vacancies are in the 7-to-8-percent range, prices have remained high. Our Pacific Rim trade is also a major factor in the strength of the region. Our World Trade Center in Long Beach is 25 percent leased.

An example of the effect of high building prices paid by foreign investors is a recent sale of a New York City office building to a Japanese group. Because of the high purchase price, real estate taxes for the building are expected to increase by 30 percent a year for the next five years. In 1988, their taxes were $6.58 per square foot; by 1993, taxes are projected as $24.50 per square foot. Either the rents on this building will have to go up, or the building will not be able to operate.

Goodacre: We are also seeing an infusion of foreign capital in Region 8. This has fueled building, but has done little to improve rents. There is a two-to-three-year supply of office space in much of the region, except for Las Vegas, so it will be that long before rents really start to improve. In addition, we have many more lenders stepping in to try and improve building values on a selective basis.

Schretter: For the first time in several years, vacancy rates for multifamily have been rising in Region 1. A couple of years ago, I could talk about almost 0 percent vacancy; vacancies in downtown Boston now range from 5 to 8 percent in market-rate units.

This vacancy is coming from the tremendous number of condominium units that were built in Massachusetts, New Hampshire, and Connecticut. These were built in anticipation of perceived investor demand, but after the passage of the tax law, the demand for condominiums dried up. As a result, many of these properties were put on the market as rentals.

This situation has presented an opportunity for property management firms because a good many of these properties are now controlled by banks.

The office building market in the region is similar to last year, with downtown Boston strong and stable. Suburban Boston has a huge amount of office construction going on so that market will become even softer, with vacancies ranging from 10 to 35 percent, depending on the area.

Johnson: Condominiums in Florida are facing an unusual situation. The market is solid in central Florida, but because there was previous overbuilding, buyers are still coming in with a "steal the deal" mentality. If they cannot get 10 to 20 percent off the asking price of the higher priced units they are not interested.

What impact do you feel that lower home mortgage interest rates had on multifamily vacancies?

Lilley: Lower home mortgage interest rates have had little effect on multifamily vacancies in the Southwest. Single-family home prices have continued to drop. And with the economy still flat, people are too unsure about job security to purchase a home.

Schretter: At least in our area, it has not been felt because the purchase of homes has not gone up. Instead, vacancies are prompted by overbuilding. As a result, some investors are willing to rent for almost anything.

Kirby: In Pittsburgh, our multifamily vacancy rate is about 4 to 5 percent, which is high for the area. And the lower interest rates for family home purchases are the cause.

Corbitt: The same is true in the Middle Tennessee area. We are losing many of our upper-end renters to home ownership.

Schretter: Perhaps low interest rates have had less impact in Region 1 because of the high price of a home. The average price of a new home in Boston is $182,000. Land is so expensive that few developers are willing or able to build lower-priced units.

Bates: I think you find this is true around every major metropolitan area. We see it around Washington. The rest of Region 3, however, has some of the lowest home prices in the country. In spite of this, we have not seen much impact from a move to home ownership on multifamily vacancies. Homes have always been affordable, so we have become accustomed to people moving up to single-family homes as a matter of course.

Sweeney: Despite a decline of 20 percent in housing starts in 1988, the average price of a house in Montreal jumped 17.6 percent to $240,000. Quebec City has also experience 15.6 percent price increase from homes, with strong sales.

Hirsch: While most condominium sales in Region 9 remain soft, the Chicago market is experiencing the beginnings of a possible new era. The prominent 700 unit Lake Point Tower building is now being converted to condominiums by American Invsco. Many observers feel that if this is successful, a new movement toward conversion could potentially follow. Relatively low apartment vacancies and increasingly higher price levels for single-family homes are also contributing to a renewed interest in conversions.

Hearring: In Region 11, we are seeing some very successful conversions lately in landmark properties. With average single-family home prices in Orange County at $231,000, condominiums are a viable option. Condominium developers have also gotten a great deal smarter in their designs and amenity packages.

Multifamily in California has vacancy levels between 3 and 8 percent, with vacancies in some of the outlying suburban areas exceeding that Vacancies in the Central Valley, which is more dependent on oil and agricultural, are also higher, but are beginning to stabilize. Demand is very great because of the attractive lifestyle and diverse economy in California.

At the same time, California is facing a variety of social issues - including toxic waste and trash disposal. In the near future, I expect that high-level residential units will have trash compactors.

Two other issues are water and security. We have several cities considering moratoriums on growth in part because of concerns over scarce water. Our lakes and reserviors are at an alltime low.

At the same time, residential and commercial tenants are becoming more concerned about security and crime.

Muhlebach: I agree that security and holding down operating expenses are two very important issues that will become more important for property managers in the next few years. Regional malls in our area providing valet service for customers. This is partially a convenience for shoppers, but also increases security. This may eventually extend to neighborhood centers.

Schretter. Trash disposal is certainly an issue we are struggling with in the Northeast. Not just the cost, which has been increasing dramatically every year. The real question is where is trash going to go. Rising costs for trash disposal as well as water and sewers are making it difficult to control costs and keep rents stable.

What do you consider the biggest current problem facing your region?

Lilley: In Texas, it is foreclosure rates. There are sales almost weekly, and foreclosures are increasing in almost every property type, in all price ranges. This situation is compounded by the failures of banks and S&Ls. All this has had an effect on the value of homes as well as commercial properties. Herring: In California, rent controls are affecting values, development, and operation of older multifamily properties. For all types of property, government remains the greatest threat to real estate in general. Developers are expected to bear more and more of the cost of city infrastructure during development.

As an example, a developer was proposing to build a 27-unit apartment in Long Beach. The city council imposed 100 percent of the allowable state education bond initiatives. This raised the cost of the project by $54,000 because of this one school bond. Sewer and park fees are also adversely affecting development costs.

Corbitt: In our area, the cities always look to real estate to recover their shortfalls. We are seeing more and more impact fees - water fees, roads, bonds to finance rapid transit. And as long as the cities are in poor financial condition, they will turn even more to existing real estate and new development to get the funds they need, which frankly are not there.

Simmons: In New Jersey in particular, property owners face such monumental burdens. In many communities, each unit must be inspected, for a fee, each time you rent it. In addition, there is an annual inspection. Every five years there is also a state inspection, all at tremendous costs.

In Philadelphia, the city government just passed a huge real estate transfer tax, one of the highest in the country, to offset its projected budget deficit. They immediately turned to real estate.

Schretter: In Region 1, the lack of affordable housing affects us in a number of ways, especially our economic growth. Firms will not relocate because of the unavailability of housing at a cost their workers can afford.

Some of this high cost is a result of zoning laws and fees, as well as of the scarcity of land and high energy and operating costs in the area. Massachusetts has been very aggressive in creating new housing programs. State agencies in Rhode Island, Connecticut, and Maine have also established programs. However, the demand still seriously exceeds the supply.

Kirby: In high-population urban areas, we are concerned with environmental issues, especially trash disposal. Some preliminary costs are just astronomical. Electricity costs are also going to be a concern, as well as reactions to nuclear power plants designated to come on line.

Britigan: Region 6 has turned the corner economically for the most part, enjoying stabilized employment and positive economic growth. We are facing a major problem of deferred maintenance and deteriorating infrastructure in many of our cities and towns, however. Current sources of revenue are not sufficient to meet present and future needs. The challenge of the 1990s will be to devise new revenue sources for such purposes.

Jacimore: In Region 5, there are several areas where the public schools are a major concern. Many are involved in federal court actions. Teachers are poorly paid, and there is an increased demand for minimum standards of performance.

There is not enough internal growth and movement into the area because of the impact the school system has on quality of life.

Hirsch: Security is a topic of vital concern in our area. Questions remain about the viability of certain residential neighborhoods in many of the cities of Region 9, especially the inner-city areas. Values are relatively low. There is a lack of real liquidity or opportunity to relocate. The matter of drugs and "crack houses" is clearly a social issue; and yet it is increasingly becoming a real estate issue as well in the region.

Johnson: In Region 4, we face the same problems. We are fortunate to have a strong economy and more affordable housing. Hopefully, if developers will remember the lessons they learned in our region during the 1970s, the economy will remain good.

Note: The IREM regions in the United States include the following states. 1: Conn., Me., Mass., N.H., R.I., Vt. 2: Del., N.J., N.Y., Pa. 3: D.C., Md., Va., W. Va. 4: Fla., Ga. 5: Ala., Ark., La., Miss. 6: Ind., Ky., Mich., Ohio 7: Okla., Texas 8: Ariz., Colo., Nev., N.M., Utah 9: Ill., Minn., Wisc. 10: Iowa, Kan., Mo., Neb., N.D., S.D. 11: Calif., Hawaii 12: Alaska, Idaho, Mont., Ore., Wash., Wyo. 13: N.C., S.C., Tenn.

Region 8

It has been over 16 months since the stock market took its nosedive, but fortunately the real estate recession that some had predicted has not occurred. Nevertheless, the economy in Region 8 is not totally home free.

Region 8's office market, weak since early 1984, has shown remarkable upward improvement in 1988. The metropolitan average of CBD vacancy in Region 8's major cities has dropped to an average of 18.6 percent. This figure extends a two-year decline and is currently at its lowest rate in over three years. The suburban average for office vacancy dropped to approximately 20.4 percent, which is its lowest since September 1985.

Lagging office demand

In Denver, the Rocky Mountains' market oversupply of office space has shown a steady decline in rental rates, and obviously, property values follow.

There are pockets of well-occupied space, and some high demand in the suburban market. Yet the Southeast Corridor, which encompasses approximately 30 percent of metropolitan Denver's total office space inventory, including a high percentage of new Class A space, continues to fight for survival. At the same time, the picture for Denver is brightening. Construction has just started on a new convention center.

With the recent passage of Colorado's interstate banking law, the downtown city district is expected to become the true money center of the Rockies by mid-1990. Major law firms, which are one of the larger percentages of long-term lessees, have included generous expansion options in recent leases. Also, more out-of-state firms are beginning to establish themselves in the regional business community in anticipation of the next economic expansion.

The positive effects of the airport land annexation in Adams County can also be found in the suburbs. These areas have maintained much higher levels of occupancy than the central business district over the last two years. Furthermore, the U.S. government's Federal Center and other large employers; together with the imminent start of numerous state and federally assisted improvements, will create new infrastructure and spur the expansion of consulting and engineering firms.

All of these new and expanding businesses point towards a healthier business economy in 1989 and, subsequently, a lowering of the office vacancy rates.

In Phoenix, 1988 saw phenomenal externally generated growth, with incoming businesses from Japan, Taiwan, Great Britain, Germany, and Australia. In this community, the valley-wide office vacancy rate dropped from 27 percent to less than 24 percent during the first quarter of 1988. The absorption for the first quarter totaled in excess of 107,000 square feet, still sharply off from the 452,000-square-foot absorption in the first quarter of 1987.

Currently, the central business district has approximately a three and one-half year supply of available office space. Like Denver, the return of legal and professional firms to new high rises and their subsequent expansions are improving this soft market picture. Other encouraging signs in Phoenix appear with the completion of a freeway system, which should occur over the course of the next 15 years.

The Uptown Central Corridor, which is the largest submarket in Phoenix, continues to soften due to the addition of several large towers along Central Avenue. As has always been the case, the prestigious Camelback Corridor continues to outperform the market with above average rental rates and a below average vacancy factor. In these major submarkets, the highest rental rates in the area vary between $16 and $26 per square foot gross.

The overall climate of the Phoenix office market remains relatively unchanged despite falling absorption levels and fewer new small and mid-size projects. Nevertheless, the market for 1989 will improve primarily based on the economic climate. Phoenix's companion markets - Scottsdale, Tempe, and Mesa - are on a fundamentally upward trend driven by powerful demographic changes.

In Reno, Tahoe, and Las Vegas, vacationers, conventioneers, and owners of small high-tech industries continue to pour in, resulting in rapid expansion of hotel facilities and business districts. The Las Vegas area is showing office vacancies at approximately 4 percent in the central business district and 17 percent in the suburban office market The west side of Las Vegas is strong; the east side is moderate; the downtown is weak. Vacancies are lower than they were a year ago, primarily because the office construction has been curtailed due to an overbuilt market and a change in the 1986 tax law. There continues to be slow absorption due to prices, and to some degree to an unsophisticated tenant base. The garden-style office projects fill up rapidly.

The multifamily area remains strong with less than a 5-percent vacancy rate. However, because of the tremendous amount of new product being placed on the market, it is anticipated that the vacancies could be in excess of 15 to 18 percent by the end of 1989.

The shopping center and retail market in Las Vegas is much stronger, predicated primarily by an improving economy. Again, there is a substantial amount of overbuilding. Las Vegas has seen a significant number of out-of-state developers come into town, creating a softer market.

Utah is seeing an extremely high vacancy in its six select areas of multifamily housing, with vacancies between 13 and 19 percent. Rents have continued to decline, with discounts and other incentives being offered.

Currently there is virtually no apartment construction in the Salt Lake Valley, and it is expected to stay that way for the next 12 to 18 months. The over building of multifamily housing experienced in 1984-1986 brought on construction moratoriums, and a freeze was put on local lending. As a result, the vacancy factor has decreased approximately 2 percent in 1988 and is expected to decline in 1989.

In office buildings, the overall vacancy is approximately 18.5 percent, slightly lower in the suburban market. The central business district is currently the strongest market, and there are positive gains in absorption. The office rental rates currently average $14 to $18 per square foot. Utah will continue to show slow growth, however, at least until interest rates stabilize.

In recent years Utah has seen a high foreclosure rate, a result of the departure of some businesses from the area. This, in turn, has produced an accumulation of inventory and subsequently a reduction in values.

Utah shopping centers are experiencing a vacancy factor of about 12 percent, with enclosed malls in the Salt Lake City area experiencing higher than normal vacancy. It should be noted that the economy is stronger now than one year ago, and as in Phoenix and Denver, the existing businesses seem to be in an expansion mode.

The Albuquerque area has been plagued by a sluggish economy brought on partly by the slackened oil industry. In 1988, there had been little or no home appreciation and an overbuilt residential market, resulting in lower sales, lower values, and flat rents. It is also noted that most people in this southern part of Region 8 had a lack of confidence in the economy due to the slight increase in interest rates in the spring and summer of 1988. The prognosis for 1989 is about the same.

Albuquerque is showing a multifamily vacancy rate of approximately 10 to 12 percent. Vacancies are beginning to stabilize, yet recovery seems to be extraordinarily slow. Absorption is tied to employment, and there has been virtually no change in that area, nor is a significant change expected.

The office building vacancy rate in Albuquerque is in excess of 18 percent The uptown area seems to be strong, but the downtown area is weaker as many tenants continue to move to the uptown area. There have been no new building starts recently because of a previously overbuilt market. Nevertheless, more than 800,000 square feet of Class A buildings is projected to come online by the first or second quarter of 1989. The Albuquerque International Airport is undergoing a $120 million expansion, which will double its capacity. This will help encourage a more favorable economic growth climate.

Shopping centers in Albuquerque have a 15 percent vacancy, citywide. There is little new product coming online, and therefore the vacancy rate is diminishing slowly from increased demand. The economic outlook for the city and the state is poor, due to the dreadful tax structure, provincialism, and the perception of quality of life which precedes the thought process of any new construction. The Albuquerque area continues to see large employee layoffs, with no immigration of new companies into the area.

Colorado Springs and Tucson are also continuing to fight a depressed economy and an average current multifamily vacancy rate in excess of 17 percent. These are two areas that are very sensitive to the economy and weak geographically. There is less construction going on, both in multifamily and commercial environments, as banks are being more cautious about making loans and investors are not anxious to come into a perceived depressed market. Office building rents are in the low end of $10 to $12 per square foot. No new industry has come to either Colorado Springs or Tucson.

A national slowdown

The probabilities of a national economic slowdown are very high for 1989 as a result of unstable oil prices and the declining value of the dollar. This does not bode well for Region 8, which has suffered dramatically since the oil decline in 1984-85. When coupled with higher interest rates and the uncertainty of a new president and Congress, economic growth is unlikely to expand.

There were reported drops in capital value and negative returns on office building investments in 1988, which will continue through 1989. It is also noted that there is a thinning of the institutional market in real estate as pension funds seek out and attempt to capture extraordinary gains in an overheated stock market. The six-month rise in interest rates further compromises equity positions in office buildings.

It is hoped that the protracted slump in the energy sector of Region 8 is slowly, but surely, unwinding. It is apparent that the days of easy stock market profits has ended, and an increase in the U.S. institutional capital allocations should improve the tone of the investment market for office properties.

Nevertheless, in direct conflict to economic forecasters, it is apparent that the momentum of declining office construction in Region 8 will continue through 1989. Existing vacancies, the slowdown in office economies, and developer uncertainty regarding overall business conditions, coupled with lender reluctance to finance speculative construction, are all factors arguing for a less than favorable outlook for the next three to five years. Region 8 is not out of the woods. As a matter of fact, in areas where construction continues, shopping centers and apartments may face higher vacancies and more foreclosures in the months and years ahead.

Careful attention to economic geography will be critical in evaluating the office market during the coming years. The same holds true for residential development. The retail property market remained brisk, yet several segments of Region 8 showed overbuilding and a higher increase in vacancy rates than ever before. Saturation in most of the major markets in Region 8 is now starting to become evident.


In summary, it should be noted that in Region 8 the commercial, retail, and industrial markets will weaken slightly for the balance of 1989 through 1990-91. A note of caution will permeate the business atmosphere.

Rents will be flat at best and modestly lower at worst in most of the region's major cities. In a few areas it may be dramatically worse.

A moderating economy will be the major contributor to increased vacancies rather than any increase in commercial or industrial construction over the 1988 levels. A further stock market decline could be devastating to Region 8, triggering a broad-scale retrenchment on the part of consumers and manufacturers.

America's greatest strength is its political and economic resiliency, and Region 8 has surely been tested. We have recovered, and we will continue to recover in the future. It is hoped that more stable economic conditions will occur in the next few years. The dollar is projected to stabilize, inflation concerns should ebb, creating an increase in exports and, thus, employment. With these factors improving, Region 8's real estate economy will recover, and equilibrium will gradually return oversupplied markets to their normal positions.
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Publication:Journal of Property Management
Article Type:interview
Date:Mar 1, 1989
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