June 11, 2010

Hoff & Leigh’s Weekend Market Report
Hoff & Leigh, Inc.
Leasing, Sales, Management, Buyer Representation
4445 Northpark Drive, Suite 200
Colorado Springs, CO USA 80907
June 11, 2010

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All Market Average Office Building Sale Price PSF = $103.03 (UP $1.46 from last week)
We are currently tracking 86 office buildings for sale.
This is 779,756 square feet, which represents a total market value of $80,339,436.

All Market Average Industrial Building Sale Price PSF = $93.20 (UP $0.38 from last week)
We are currently tracking 71 industrial buildings for sale.
This is 880,258 square feet, which represents a total market value of $82,044,406.

To view our most recent Colorado Springs Business Journal Ad please click below
http://hoffleigh.com/Doc/5.28.10.pdf


Tim’s Market Report

“My best guess is that we’ll have a continued recovery, but it won’t feel terrific. Even though technically we’ll be in recovery and the economy will be growing, unemployment will still be high for a while and that means that a lot of people will be under financial stress.”
Ben Bernanke
Last week

Everything I’m reading these days says that we should expect very low GDP growth at least until 2014. I don’t know how the smart guys can dial into a specific date like that, but many writers are saying the same thing. So I’ll chime-in, not because I have a crystal ball, but because that seems like the smart-money bet. Personally, I’m planning on a slowly growing economy with a possible serious disruption to that growth if Mayan predictions come true and the world ends in October, 2012. Otherwise, from what I’m reading you can plan on GDP growth in a range of 1.25% to 1.95%. (That’s as opposed to a historical norm (past 68 years) of around 3.82%, and by the way, an average annual US GDP growth rate during the Great Depression (1930 – 1939) of 1.32% per year.

Then, when you add increased volatility in the markets, (see for example, a few weeks ago when the DOW dumped nearly 1,000 points “but rebounded” so the total daily loss was “only” around 400 points), we have a greater chance of multiple V-shaped recessions. Multiple recessions will cause business to periodically pull-in their oars, which will create systemic, higher rates of joblessness, which will chronically drag the economy. The borrow, borrow, borrow, spend, spend, spend party is over. For the foreseeable future, we’ll spend less, pay-off debt and save more. And while that sounds good in theory, it’s not the correct formula for rebuilding a consumer oriented economy, which by definition means you have to consume. So, as George Bush reportedly said, “Do your patriotic duty – go shopping!”

And, as you know, I’ve been preaching that much of our commercial real estate inventory is overvalued and until prices come into alignment with the market, we’ll continue to experience sluggish commercial real estate sales. (The average listing price for a commercial office building today is $103.03 psf. Our price-line has been trending downwardly over the past 24 months from a high of $111.00.) I expect to see continued downward pressure because of “lack of demand”.

Lack of demand is caused by general market conditions, but as an added insult in our market, our office building inventory is outdated; much of it is functionally obsolete and in need of significant repair. The assessor says the average office building’s worth $70.14 “as is”. If you subtract the cost of renovation, say, $25 psf, the average is more likely around $45 - $50 psf. Don’t believe me? Ask any old-timer if he remembers the 1980’s recession when we were buying office buildings for $10 psf. I guarantee if the market was priced at $50 psf we’d see an immediate uptick in sales, followed by a robust remodel business and an increase in overall activity, which is all good; but that darn demand; until we get more jobs. . .

Anecdotally, last week I met a guy who wants to sell his 5,000 sf warehouse. He bought the building in 1986 which was when Colorado Springs was the foreclosure capitol of America. He paid $150,000 and his payment was $1,500 per month. Without the benefit of this prior knowledge, he asked me to value his building. I blindly told him as an investment; $150,000 ($30 psf) if he’d finance it with no money down and carry the note at $1,000 per month. I calculated, based on the building’s expected rental income and operating costs, accounting for a very narrow profit, that’s all the property could support. Of course I hurt his feelings. So, let’s see; he bought in ‘86. It’s now 2010. That’s 24 years of ownership with no increase in value and a loss in expected monthly rental income. Hmm . . . How’s this supposed to work again?

So here’s the short course; when the economy’s flat, there’s less demand for commercial buildings. If there’s less demand, building owners have to move aggressively to capture tenants (usually cannibalizing from their neighbor’s building) so they drop their lease rates. When lease rates drop, building’s income declines and corresponding values decline. When the value of one building decreases, it negatively impacts similar buildings in the neighborhood which (then) also experience decreasing values. It’s like a campy horror movie where some guy named Freddy jumps out of a sock of hay with a dull chain saw and starts to cut-away at your limbs ever so slowly until you finally bleed to death. And until we can increase demand we’ll continue to be mired in the slog.

FROM THE CAMPAIGN
Q: Are you still running for Mayor
A: Yes.

Q: Why are you running for mayor?
A: Because I’m about to become a grandfather and I care about the environment that my kids & grandkids will inherit and I believe Churchill, who said, “you make a life by what you give.”

Q: Could you expand?
A: Sure; Colorado Springs is at a tipping point. And depending on the next election, and depending on the leadership skills of our next crop of leaders, we could become a lonely single-wide mobile home sitting on the eastern edge of El Paso County, with 3-foot tall prairie grass blowing in the hot, dry, dusty wind, where the only sound you hear is the sound of an aluminum door with a broken window, trying to clap shut, wham, wham, wham, – or we could become that cherished World Class Destination that I’ve been preaching about which, by the way, was what our founders envisioned.

Q: What is the biggest issue facing the city right now?
A: We have a crisis of confidence in our elected officials and the embedded bureaucracy. That’s evidenced by the fact that there are very well intended (multiple) groups who fashion themselves as “private oversight commissions” who are trying to watchdog local government and make sure it’s not wasting our resources. And, I’ll bet that every ad hoc overseer wishes he had enough confidence in our local government to know, that left to its own devices, it would run efficiently. Look, people are frustrated because our parks aren’t getting water or trash cans; our streets have ever-increasing pot holes and we’ve turned-out the lights.

Q: You continue to predict slow growth in the economy. What impact do you think that will have on the city budget?
A: First the good news; I heard the budget gap for this next budget cycle has been (mostly) filled and that we should have enough revenue to cover (most) of our called-for costs. That’s huge for Colorado Springs, because just a few months ago, the forecast was for a $29,000,000 million shortfall. And I think a pat on the back should be extended to the city’s financial managers who creatively discovered ways to cut & balance our budget. We have beaten these folks so badly over the past few years that it now seems incumbent on us to congratulate them when they get it right.

All governmental bodies will experience unprecedented financial stress for the foreseeable future. This means we have to be significantly more judicious with our resources. I’ll bet I meet at least 1 person every week who demands that all city employees take an “across the board” pay-cut. And while we need to be judicial, that’s not likely to happen, and while “it’s good conversation to stir the pot”, that’s about all it does. The reality is, most city departments have cut staff and budgets significantly and are doing the best they can to deliver the services we’ve demanded in the past; with operative words being “we’ve demanded” and “in the past”.

Now, “today”, we’re at a point where we have to engage in a higher conversation about expectations. What services do we expect from local government in a diminishing revenue environment? We can’t expect a full-smorgasbord. We can’t naturally fund the green-beans and spinach and the chocolate pudding without being more business-like and very entrepreneurial. (And by the way, it’s not the role of government to provide chocolate pudding.) The way we used to govern has changed; the way we used to collect revenue and spend is a bus that left the station. Now we need to look forward, creating new models; everything from public/private partnerships to budgeting for outcomes. Everything has to be on-the-table and up-for-grabs. Kennedy said “change is the law of life. And those who look only to the past or the present are certain to miss the future.” We need to put our eyes squarely on the future.

Q: Do you have any parting comments?
A: Yes; I’ve concluded that the community conversation has been miscast. Beating the embedded bureaucracy is beating a dead horse and it’s beating ourselves - “we are them”. We need to recapture our can-do inner-arrogance; that we can accomplish great things; we need to recognize our community assets and promote them; we need to realize that it’s “us vs. them” and the “us” is the entire city, (constituents and bureaucracy, (the aggregate), working as partners, and the “them” is the global economy. We have to make this a city worthy of consideration; a World Class Destination.

When we get the conversation right, we’ll realize that we have no limiting factors; there’ll be no mountain we can’t climb; no river we can’t cross; no gap we can’t bridge. . . I’m just saying. IT’S TIME.

Sincerely,

TJL

Tim Leigh

719-337-9551

Tim@HoffLeigh.com