Tucson Commercial Real Estate Frequently Asked Questions* * Actually… no one has asked them, but I will answer them anyway!
FAQ #1 Was the 2008-2011 Recession the Worst in Tucson’s History?
We’ve been through this kind of recession before. Here are the comparisons: 1992 2009 2016 Recession Recession Recovery INDUSTRIAL VACANCY 18.9% 17.5% 7.8% RETAIL VACANCY 12.8% 12.5% 6.4% CLASS A APARTMENT 16.4% 9.9% 6.9% VACANCY OFFICE VACANCY 21.4% 16.9% 11% SFR BUILDING PERMITS 2,074 2,077 2,928
FAQ #2 Did Commercial Real Estate Get Hammered the Same Way that Residential Real Estate did During the Recession?
FAQ #3 I never understood cap rates. Is there any reason to?
Understanding Cap Rates “IRV” USE THE RULE OF THUMB! I • I = Income (Net Income/Year) • R = Cap Rate (The investment ÷ return as a percentage of the value of the investment ) R V • V = Value (The investment value based on the net income and cap rate) x
Example: McDonald’s Lease Income: $100,000/year Investor Requires a Cap Rate of 5.5%/year Investment Value: ???
Investment Value: $1,818,182
FAQ #4 What Happens if Interest Rates Increase?
Effect Of A 1% Interest Rate Increase On Real Estate Values: Over time, cap rates track interest rates, so as interest rates increase so do capitalization rates. When cap rates go up, the value of the real estate investment goes down. In the McDonald’s example:
• If interest rates go up by 1% next year, it is likely the cap rate that investors would pay for that income would go up, and the value would decrease. 2016 Value Potential 2017 Value The difference: $279,721 in lost investment value
FAQ #5 Is the Commercial Real Estate Market Bifurcated? Good Properties Bad Properties
FAQ #6 Will Amazon and Ebay Spell the End of Retail Stores?
FAQ #7 What about Workforce Policy?
DEVELOPMENT ● BROKERAGE ● MANAGEMENT For Questions Or A Copy Of This Presentation, Please Contact: George C. Larsen, CCIM 520.296.0200 x 217 george@larsenbaker.com
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