Andie Wilson and Brad Bonkowski on commercial real estate: How long can we ride this wave?
In 2006-2007, we experienced a unique phenomenon. We were surrounded by people, most doing well in the booming Nevada economy, all of whom were possessed with the idea the bubble would never burst.
Natural worry-warts, we were extremely concerned in fact, the bubble would burst at any moment. As we passed through New Year 2008, we literally braced ourselves for the inevitable dropping of the other shoe, where the cycle would halt, the boom would bust, the road would not go on forever and the party would painfully end. We called all of our investor clients to advise them to sell — immediately! Not a single client heeded our advice. They called us cynics, doomsdayers! The world was so perfect, they felt the good times would never end.
The financial markets crashed in October 2008, and we spent the next two years in free-fall, trying to pull ourselves through endless days with non-existent commercial lending markets and no sales volume. Now we were surrounded by miserable clients who regretted not selling at the peak, who now needed advice about how to negotiate with banks they perceived as unreasonable, preparing to foreclose. We were lucky enough to survive seeing our firm’s income reduced by 90 percent for a multi-year period, however most of our peers in commercial real estate were prepared with savings to last the recommended six months, not the six years the recession finally ended up lasting.
Fast forward to February 2016, and it feels eerily similar to February 2006. Investors call us, coming out of exchanges, desperate to find a suitable income-producing property. Our local economic development agencies are busy working with manufacturers who are relocating or expanding to Nevada, and we are busy finding them property. The obvious question looms large: Is October 2008, and the inevitable crash after the boom, lying in wait behind in the foreseeable future?
We must preface the answer to this question by warning our crystal ball is cracked and foggy on the best day, and lost under our desk on the worst day. While we follow forecasts and predictions from wise economists and developers and follow several important economic market trends, we acknowledge we don’t know anyone named Nostradamus. So consider this advice only an “educated guess.”
One scenario, from the most conservative developer we know (one of the few who survived the recession with his career, company, family and pride intact), says we have 2016 to make hay, and that’s it. Darker days lay in wait after you’ve put your Christmas decorations away. So save like a squirrel now — all bets are off for 2017.
We also swim in circles with plenty of risk-takers, guys who aren’t afraid to play the “come line,” and aren’t afraid to lose a million here or there if the chance to make $10 million is a somewhat realistic possibility. These risk-takers are currently putting it all on red and will tell you, as they’ve told us, the skies are sunny and clear until 2019-2020 … essentially for the foreseeable future.
Being the moderate conservatives we are, our prediction is the commercial real estate markets will continue to do well, with property values and rents increasing and vacancy decreasing, for the next two to three years, barring a black swan event such as another terrorist attack on U.S. soil, North Korea declaring nuclear war on its neighbors, or China’s economy completely imploding.
Why is that our prediction?
As the stock and commodities markets cycle down or fluctuate wildly, which they have been doing, it’s normal for real estate markets to cycle up as a perceived safe haven. Indicators are gold, silver, and oil still have a ways to go before stabilizing, and their recovery may take two to three years.
Every important indicator of economic health in Northern Nevada is bright green. Employment is high, wages are strengthening, forecasts for increased employment go nowhere but up as large companies like Switch, Ghost, Apple, Google and Tesla continue to choose Northern Nevada as their home.
USA Parkway will connect Interstate 80 at the Tahoe Reno Industrial Center (the largest geographic industrial park on the planet) to Highway 50 East in Silver Springs. This improves the logistics of our already unparalleled central location in the western region, which offers one day truck travel to seven western states.
California. Could we ask for a better neighbor? Rebuffing the sentiment “If you can’t beat ‘em, join ‘em,” manufacturers based throughout California have taken on a new motto en masse: “If you can’t beat ‘em, move to Nevada!” California can’t get out of its own way. Just when you think it can’t increase the burden on business anymore, it shocks us all and figure out a way. While much ado has been made of our Nevada Legislature’s last session and the approval of the commerce tax (as business owners we’re certainly not fans) this tax doesn’t represent the end of the world nor the demise of Nevada’s reputation as a business friendly state. Remember, everything is relative.
Cycles can be predicted. As much as the 2008 crash seemed shocking, and certainly some unique abnormalities contributed (like the CMBS market and widespread mortgage fraud), the truth is real estate markets typically follow predictable cycles and the trick is to recognize where you are on the curve of the current cycle. The real question is: “How deep (or shallow) and long (or short) will the next recession be?”
This is all merely educated conjecture. Today, we are cautious optimists. In 2007, we were Chicken Little, terrified the sky was falling right before it fell. Just because we’re planning for two to three years of good times, and then some bad, doesn’t mean we’re right. That answer is much more complex. Stay tuned …
Brad Bonkowski, CCIM and Andie Wilson, CCIM are owner/brokers of NAI Alliance Carson City, a commercial real estate brokerage. They can be reached at 775-721-2980.