Office Space, Dislocated?
Craig Willett, UTAZ Development
With the collapse of the housing market in Phoenix and the corresponding melt-down of Arizona financial institutions, the availability of funds has been scarce for anyone looking to start a business and open their doors. The secondary markets to sell the loans disappeared completely between the collapse of Bear Stearns and the collapse of Lehman Brothers from April to September last year. The US Government has offered money to help encourage banks to lend. But evidence of the banks doing anything other than modifying or extending existing loans or wholesale dumping loans and using the TARP money to plug the hole is non-existent. Last week President Obama announced his initiatives for Small Business. This is only part of what needs to happen. In addition, the secondary markets need to function. In absence of the secondary market, the President announced that the Government would buy SBA loans thereby creating a secondary market. Granted, that it truly is for only one investor,- Uncle Sam. However, this creates a glimmer of hope when coupled with the massive $1.2 trillion announcement out of the Federal Reserve yesterday that a massive release of pent up demand for houses and mortgages has begun.
Quietly, in Arizona, we are beginning to see three offers presented for some homes and the only way to get the home is to offer 10% more than the asking price. This is an encouraging demonstration of price stability and price recovery. For those who want to wait for a bottom, you may have missed it. With the total mortgage market at $3 trillion and the Fed prepared to do the $500 million announced last fall coupled with the $700 million announced yesterday, the demand is finally being unleashed and mortgage rates are dropping below 5%.
How does all of this impact office space? With the boost in confidence generated by this latest move and the return to price stability, the consumer will have to act with greater confidence and determination as they no longer will be rewarded with lower interest rates and prices by sitting on the sidelines. In the small office market we see commercial mortgages as low as 5.25%. The boost in confidence is showing some absorption in the office market by lenders, title companies and some real estate companies by reopening offices once closed due to lack of business. As well, with the mortgage modification programs there have been a rash of companies coming to the Phoenix market to be in a position to take advantage. In my own company, we have seen our vacancy rate cut in half in the last six weeks on our leased office portfolio because of the rush created by the confidence signaled by the Fed’s actions and apparent understanding of the ailing economy.
The absorption of ready to occupy small office space will lead to an increased demand for wise small business owners and medical practices to take advantage of lower prices and historically low interest rates to buy shell office space and grab the great locations to start creating value for their businesses and practices. Location is one of the keys to creating value today and retaining it in the future. You create franchise value by your location that transfers when you sell your business to the new business owner because of the familiarity of the general public with your location. If your business or practice’s office is visibly located on a street with a traffic count of 22,000 vehicles per day, this means with only one person per vehicle your building and name is seen by over 8 million, yes 8 million people per year. Better than any other advertising means. According to the SBA’s web site, “The United States Small Business Administration Bulletin Number 101 on signage for businesses says, ‘…signs are the most effective, yet least expensive form of advertising for the small business.’ What’s more, signs are always on the job for you, advertising 24 hours a day, 365 days a year.”
Recoveries to economic downturns are only officially recognized after the recovery is in full sway for more than 6 months. Those who are truly visionary and entrepreneurial will see the signs in Phoenix that I have mentioned and will recognize that now is a great time to open that new office or commit to a purchase. There is a prevailing thought that if I lease now at great rates, I will be able to get a better deal on office space in 2-3 years. If you had that same thought 4 months ago, chances are the home you wanted is now 10% higher in price. What about interest rates? In 2-3 years, with all the money the Fed is printing, certainly our economy will see inflation which means higher prices and higher interest rates. Those who delay purchasing their office space for signing a lease will not only miss out on great prices and incredible interest rates, but they will miss out on 2-3 years of mortgage amortization. This means that retirement will be 2- 3 years farther away for them, not closer. The last 3 years of a mortgage under a typical amortization is when the most principal is paid down.
Don’t let the dislocation of the economy have you make a short term decision to lease and thereby affect your long term plan of having a successful, well located business and an augmented retirement through owning your own building rather than having only a stack of cancelled rent checks.
