Norton On Real Estate
I was recently enjoying one of my favorite pastimes (hint — it has 18 “elements,” involves walking and takes about four hours). I was with a banker, a trust officer and an import-export broker. The latter asked me where I thought interest rates were going. I’m sure he also asked the banker, but I did not hear his reply.
I see interest rates nudging up at least two more quarter-point moves over the next four months, maybe more if someone keeps mentioning the “i” word (inflation). Certainly, fuel costs are up. We help manage a large medical office building, and energy costs, especially electricity, are up at least 40 percent over budget. We decided to notice the tenants early and compute a “true up” rather than leave this news to the 11th hour and spring a sizeable invoice on them at the end of their fiscal year. We pro-formaed $2.50 a square-foot for utility expense. This was $2 a square-foot for electric ($1 for air conditioning and $1 for lights and plugs), along with 40 cents a square-foot for gas heat and 10 cents for water and sewer. The gas is running about 50 cents a square-foot — while 20 percent over the estimate, it is still manageable. But the electric is 40 percent over the estimate of $2 a square-foot. Added together, these equate to 90 cents a square-foot that each tenant is obligated to pay. Real estate taxes for this building are also climbing.
While this was a new build-to-suit property with customized medical office suites, most office buildings are in such intense competition for tenants that the landlord would likely absorb (i.e., “eat”) most of these additional costs.
We recently completed a tenant representative assignment for a 20,000-square-foot office tenant and found eight properties in Manchester that could meet the requirement. Needless to say, we were able to secure a very competitive office rent for the tenant. The landlord will absorb some of the off-site parking costs and do extensive fit-up to make the space match the tenant’s exact requirements.
So it is a good time to be an office tenant. Office space supply exceeds demand. This is not likely to change soon. Even though the economic data for the past month suggests lower unemployment along with higher productivity and profitability, the office-seekers we see are for the most part not taking on more space.
This is due to relentless global competitive pressures, as well as a strong sense that competitive pressure to remain profitable will not let up any time soon, if ever.
On another recreational outing I was talking with an automobile sales manager. He was attempting to be upbeat, but in confidence he made clear that sales are lagging and trucks, SUVs and big cars are not selling. This trend has been confirmed in recent newspaper and magazine articles. Some of these articles go on to say that consumer confidence and spending is weakening.
It is not difficult to get gloomy over these reports. But if you step back and look at the global picture, things are more upbeat. The recent “no” vote on the European Union’s Constitution has caused the euro to weaken, which in turn has allowed the dollar to strengthen. Something like $80 billion of foreign investment comes into the United States each month. Despite low interest rates, the U.S. is still seen as the strongest economy and the safest (i.e., most liquid). With so much capital coming in, interest rates will not rise too much.
In fact, low interest rates for commercial property mortgages (currently in the 6 percent range, up from the mid-5 percent range six months ago) are still historically low and quite affordable. This has kept the commercial real estate sector strong, despite vacancy rates above the historical 5 to 10 percent range. It is a good time to buy real estate you want to own (low 10-to-15-year mortgage rates) and it is a great time to sell property you don’t want to own. Again, low interest rates bring buyers, and we will probably not see capital gains tax rates this low for quite some time.
Overall, it is pretty much business as normal, but most folks would not be surprised if things slow down/cool off somewhat over the next year or so.
Lastly, don’t forget to enjoy your summer. Here are some summer reading ideas. What better thing to do when it rains?
• “Ben Hogan: An American Life” by James Dodson. This is a crisply written biography of the Depression-era kid who became one of golf’s greatest players, served in the Army Air Corps in World War II, survived a bus crash and came back to competitive golf through sheer determination.
• “Colossus: The Rise and Fall of the American Empire” by Niall Ferguson. This is a proactive and insightful examination of American’s role following the Cold War. Should there be only one superpower? Is this a stable strategy on the global chessboard? Is America up to the task? Should it be?
Bill Norton is president of Norton Asset Management. In addition to his active brokerage work, he is a Counselor of Real Estate. He can be reached at email@example.com.