Commercial medical office real estate should do very well in Tucson with the new health care law

While I’m sure about everyone knows the health care law is now passed depending upon what your thoughts are you may like the new law, or dislike it either way at this point not a whole lot is left to debate. For real estate investors that are quick and like to take advantage of new changes I would be very willing to bet real estate in the health care sector is about (already happening) to take a jump.

The premise behind commercial real estate that can or is being used for health care providers doing well (going up in value) with the new law is very basic. Since almost ALL Americans are going to be able to access heath care the need for doctor office space is going to surge specifically in areas where many did not previously have health insurance reside. These areas where many un-insured potential patients live also currently in most situations are areas where hospitals, and doctor offices are not prevalent. It would make sense for investors to scoop up and develop these into medical office buildings (real estate) or for individual doctors and health car providers to do the same as they are about to get a lot more potential customers in areas where its not established to have a presence.

The other area to concentrate in is the areas around established hospitals. While predominately land and commercial building near hospitals have always been a natural place for real estate dedicated to health care to be located, with so many more people about to get health care demand for more hospital space and offices can only rise. Smart commercial real estate investors should be looking to buy existing medical office buildings and/ or land near them that is correctly zoned for as that land should become more valuable when the demand for heath care increases significantly when everyone has insurance and will want to use what they are paying for or being provided.

While I do not specifically handle commercial real estate transactions or pretend to be an expert upon the subject I think for any doctor, heath care worker, or wise real estate investor it’s somewhat obvious the new heath care law is going to create the need for additional commercial real estate space!

If you would like additional information upon commercial real estate in Tucson feel free to send an email or call and I will put you in touch with a commercial Realtor that can help you directly as each segment of the commercial market is highly specialized and the health care/ medical building commercial segment is much different then let’s say the restaurant, or regular office building real estate.

This article is from www.realtor.org and talks about what issues and expectations that should impact commercial real estate in the United States for the next coming year (2009). I thought this article was decently interesting as it does bring up some serious issues that are relevant to Tucson Arizona’s commercial real estate market.

Since commercial property performance usually tracks economic conditions, it will come as no surprise that 2009 looks like a challenging year for commercial real estate owners, brokers, and managers.

“The weak economy has shifted the fundamentals in commercial real estate,” says NATIONAL ASSOCIATION OF REALTORS® Chief Economist Lawrence Yun.

Office, industrial, and especially retail can expect rising vacancies, stagnant or falling rent growth, and flattening cap rates. Even multifamily, which you might expect would benefit from tumbling residential sales, will just hold its own. Rents will stagnate at around 3 percent in 2009 and absorption will not keep pace with even the slowing level of new product coming online.

“For now, at least, more people are doubling up or moving back home rather than renting,” notes Yun.

Housing Must Lead the Way Out

If commercial’s nose dive grew out of the fall in residential home sales and the ensuing financial meltdown, recovery for commercial sectors will likewise depend in large part on housing’s recovery, says Yun. Housing typically leads the economic recovery, so when home prices firm up, the economy will start expanding. Increasingly confident households will renew spending, and businesses will ramp up hiring.

“We need to jump start this virtuous cycle,” says Yun. But whether this recovery will come in 2009 is still questionable.

Housing’s recovery still rests, in large part, on the availability of credit. Credit started to loosen in late 2008, thanks in part to the massive injection of federal funds into financial services companies in September and the Fed’s decision in late November to purchase mortgage-backed securities. But it will take considerable time before credit availability returns to normal.

NAR has been calling for an additional stimulus—interest-rate buy downs and help for troubled borrowers—to provide the economic boost that can get sales rolling again.

“Only by getting buyers back into the marketplace will there be home price stabilization,” says Yun. “And only then will mortgage-backed securities start trading on Wall Street again, helping to thaw out the frozen credit market.”

The good news for commercial borrowers is that commercial mortgage-backed securities may come back fast once credit eases because investors won’t have the same trouble pricing assets that they’ve had in the residential sector, says Doug Duncan, chief economist for Fannie Mae.

“Because the ratings of CMBS are based more on individual property performance, there’s a greater likelihood that these securities will produce the returns anticipated,” Duncan says.

If credit does ease by mid-2009, it won’t come a moment too soon for the many commercial property owners whose loans are due to roll over in 2009. Bob Bach, chief economist of commercial brokerage giant Grubb & Ellis, said in an Investment News report that close to $40 billion in commercial debt is set to expire in 2009.

A good portion of lenders will balk at refinancing this debt because of falling commercial property prices and tighter lending standards. That means that some properties will be sold at severely reduced prices. Retail and office properties will be hardest hit, he says. Cash-rich buyers, especially those from offshore, might find the biggest commercial property bargains since the early 1990s.

For owners who don’t have to sell, sitting tight and managing for better cash flow remains the best strategy for 2009. That’s why transaction volumes, which declined by 70 percent between the second quarter of 2007 and the second quarter of 2008, will almost certainly fall further in 2009.

Commercial real estate prices could fall by 15 percent to 20 percent from mid-2007 highs, according to the 2009 Emerging Trends in Real Estate, developed by the Urban Land Institute and PricewaterhouseCoopers.

But 2010 should be much better. Yun is forecasting a U.S. economic recovery in 2010, which should help drive up prices, rent growth, transactions, absorptions, and investment returns.

The big question is the health of other economies. If they’re not growing too, the demand for U.S. assets and asset-backed securities will remain dampened, which could soften financing availability for commercial property.

NAR’s Projections for 2009

OFFICE

Job losses, especially in the professional business sector that uses much of the country’s office space, are reducing the demand for office space. In the last four recessions, job losses continued an average of 17 months after the employment peak, says Mark G. Dotzour, chief economist at the Real Estate Center at Texas A&M University. If that benchmark holds true, employment should pick up by May 2009, he says.

• Office vacancy rates are projected to rise to 14.4 percent in the second quarter of 2009 from 12.9 percent in the second quarter of this year. Annual rent growth in the office sector is likely to be 3.2 percent this year, but it should decline to 0.4 percent in 2009.

• Rent grew 8 percent last year.

• Net absorption of office space in the 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is expected to be 14.7 million square feet in 2008 and 10.9 million in 2009, contrasted with 57.3 million square feet in 2007. An increase in the amount of new office space coming online in 2009 contributes to this significant drop.

INDUSTRIAL

Healthy exports had been one of the bright spots in the U.S. economy in 2008, but uncertainty in world economies and a recovering dollar could weaken overseas demand. Still, American goods remain attractive to overseas buyers so warehouse space should remain relatively stable, especially in coastal ports.

• Vacancy rates in the industrial sector are forecast to rise to 10.8 percent in the second quarter of 2009 from 9.9 percent in the second quarter of 2008.

• Annual rent growth will probably be 1.1 percent in 2008 and 1.0 percent in 2009. It rose 3.6 percent in 2007.

• Net absorption of industrial space will be a negative 16.7 million square feet in 2008, then reversing to grow to 35.3 million in 2009. Net absorption totaled 120.3 million in 2007. Developers may find some business in build-to-suit properties, leaving many obsolete structures unoccupied.

RETAIL

Consumer spending, already falling to levels unseen since the 2001 attacks, will continue to tighten for the foreseeable future.

• Vacancy rates in the retail sector should be 10.4 percent in the second quarter of 2009, up from 9.7 percent in the second quarter of 2008. Average retail rent is projected to grow 1.2 percent in 2008 before contracting 0.9 percent in 2009.

• Retail rents grew 3.2 percent in 2007.

• Net absorption of retail space in 53 tracked markets is likely to shrink by 2.6 million square feet this year before increasing by 2.8 million in 2009. In 2007, 11.1 million square feet of retail space were absorbed.

MULTIFAMILY

The outlook for the apartment rental market remains fairly positive as many potential first-time home buyers remain on the sidelines.

• Multifamily vacancy rates are expected to rise to 5.9 percent in the second quarter of 2009 from 5.4 percent in the second quarter of 2008.

• Average rent is forecast to grow 3.9 percent in 2008 and 4.0 percent in 2009, compared with a 3.1 percent gain in 2007.

• Multifamily net absorption is estimated at 61,400 units in 2008 in 59 tracked metro areas and 188,200 in 2009, in contrast with 234,400 in 2007. Unsold condos in many markets may add to the inventories and weaken overall absorption.

Tucson’s commercial real estate market seems to be slowing along with the rest of the economy. All sectors (retail, office, apartment, and industrial) seem to be in line to see slowdowns in expansion (new construction). Higher vacancy rates are expected as well.

Though retail real estate should start to see slowdowns due to the overall weakening economy, I do see Tucson holding up better than many other areas of the country. Its growing population puts direct demand on all sectors of real estate. Large retailers, however, will be very cautious about taking on new space. Smaller retailers feeling the pinch will most likely look for concessions from landlords to help get them through if the downturn is more severe than predicted.

Office space in Tucson seems to be in decent shape, though vacancies were up 13.4% in 2007. There are still some large vacancies, most notably one vacated on Wilmot and 5th St. New tenants are needed for several other offices that were vacated by now-defunct mortgage companies and other real estate related industries. Otherwise, the office market seems strong, and 2007 should be a blip on the radar screen. Look for the office market in Tucson to be poised for strength.

Raw land prices in Tucson have been hard hit for the past two years. Most homebuilders — if not all — large and small, have stopped buying land and are trying to weather the strong residential downturn as well as possible. Along with the rampant speculation in homes during the boom, there was also a great deal of pure speculation in Tucson land. There are currently many, many small parcels (10 acres and less) for sale all over Tucson. A good deal can be arranged assuming the buyers have cash available. Land purchases typically require 30%-50% down.

The industrial market seems to be strong currently. The Rockefeller Group obtained 22 acres near Tucson International Airport to develop a new industrial center. This industrial center will house a Target Corporation distribution center for Target.com for the entire western United States. A key industry that is emerging in Tucson is solar energy technologies. These new companies are leasing considerable amounts of industrial space and paying high premiums to do so. If the solar technologies continue to grow (which seems a sure bet with oil and other energy prices at current levels), the solar industry may be a large growth machine in Arizona — specifically in Tucson and Phoenix. Since Tucson is one of the most sun-drenched areas in the world, it is an obvious base for the development of solar technologies.

Apartment rentals are feeling the pressure from the sagging real estate market. Many would-be sellers are unable to sell their homes, and so they attempt to rent them out. With so many of those homes in competition with each other, rents are incredibly low. Potential tenants can rent homes for the same or just a little more than an apartment would cost. For the rest of 2008, I cannot see anything changing this situation for the local apartment complexes in town. After the residential side picks up just a little life, some of these homes will be absorbed and slowly sold off. This will help apartment rental rates to increase substantially.

Don Bourne, CEO of Bourne Partners — one of the largest commercial investors and developers in town — has purchased the AOL building located at 5401, 5421, 5431, and 5451 E. Williams Centre. The buildings total approximately 196,179 square feet of premium office space. Bourne, the original developer of the buildings, completed their construction in 2001 and sold them to a New York based investment group for $30.6M. After a few years of ownership, the group decided to sell because this one office complex was their only asset west of the Mississippi River. They wanted to limit their holdings to properties closer to their base. Don Bourne stepped up and repurchased the property. He stated, “We think it’s great real estate, and we thought there would be good demand for lease space in those buildings for a long time to come.” The major tenant of the complex is AOL, who occupies three of the buildings — about 100,000 square feet. When a major investor and presence in the Tucson real estate marketplace such as Don Bourne takes a stance to step up and buy a very large office complex, that has to set the bar. Markets will take notice that though Tucson’s commercial market, like its residential market, may be soft right now, in the long run, the market is a buy. Buying now may seem like jumping off a cliff, but the biggest money in real estate is always made when everyone is running out of it and no one wants to buy. Well, except Don Bourne and a few others who dominate the local Tucson market, such as Chris Kemmerly and Steve Quinlin, who recently purchased all of the local assets of national homebuilder Standard Pacific. Kemmerly also sold his interest to Standard Pacific a couple years ago, only to buy it right back.