Economist: Commercial real estate the way to go

Ted Jones, chief economist and senior vice president for Houston-based Stewart Title Guaranty Co., will be one of the speakers at Thursday’s Wichita Area Economic Outlook Conference at Century II.

Jones, who has also served as an economist at Texas A&M University’s Real Estate Center research group, talked with Eagle reporter Bryan Horwath about the commercial real estate market locally and nationally.

Q: You’re bullish on the commercial real estate market right now. Why?

A: If you look at your investment space today, we have bond markets that nobody is interested in because yields are so low, money markets are a joke because you’re losing ground to inflation, and the stock market has been overpriced.

Because of all this, it’s continuing to be a great time to overweight in real estate. According to Real Capital Analytics, the cap rate on the upper quartile of commercial properties in Kansas for the last 12 months averaged 7.3 percent. That means that for every $100, you’re getting a 7.3 percent return. I don’t know any other investment alternatives that did better than that the past 12 months.

Q: Those are Kansas numbers from Real Capital and they sound good, but are they true for the Wichita market?

A: Wichita actually has lost 1,400 jobs in the latest 12 months. Wichita is in probably the world’s premier small aircraft manufacturing region, but since President Obama has been in office, he’s been anti-business, which has spilled over into private aircraft manufacturing.

Wichita does, however, have an amazing group of industries with a great technology twist, which leads to longevity in the long run with hiccups in the middle. Wichita is also a major university town. Stewart is a top-four title insurance company that does business in all 50 states … and multiple foreign countries, and what we know is that we want to be in major college towns and capitals, because those economies usually don’t have the hiccups that others do. Universities are a tremendous foundation to a community.

Q: In Wichita, we’re seeing a number of new commercial developments, including the $50-plus million renovation and addition at the downtown Union Station site and some other projects on the outskirts of the city. Is what we’re witnessing part of this idea that commercial real estate is a smart play these days?

A: Any investment decision is a risk-reward tradeoff. Yes, I think people are saying, “Hey, where do I park my money?” and what they’re finding is it’s a good move. I mentioned the Kansas cap rate for the upper quartile earlier – the U.S. rate for the same time period is actually 6.6 percent, so you’re getting a little better yield in Kansas and in Wichita.

Q: You say the U.S. commercial real estate market actually had a bigger hole to get out of than the housing market following the economic downturn a few years ago. How so?

A: The commercial real estate market had a bigger bubble and plunge than the housing market in the bust of 2007 and 2008. Commercial real estate sales nationwide peaked at $573.8 billion in 2007, and by two years later, we were at $68.4 billion. … That’s not a plunge, that’s a disaster.

Right now, the U.S. is only 15.6 percent below that prior peak (in 2007), and the Kansas numbers show a very similar trend. Excluding energy cities, such as Houston, we’ve been very reticent to overbuild markets because we remember the pain that we saw in the late 1980s and the bubble of 2007 and 2008. Now, we’re kind of following the old rule that we followed decades ago where we want to get at least 50 percent of a structure pre-leased, and we want to have a significant amount of owner’s equity in the property. You’re seeing that 30 to 35 percent equity in a property is a very common ground now because people know the lender is going to be all right with at least 30 percent.

Q: What’s another trend that you’re seeing in the U.S. economy?

A: The stepchild of all real estate, I think, has always been industrial. What is amazing today is that it’s one of our best sectors, which is largely because of innovative technology such as hydraulic fracturing of shale formations. We’re sitting here with an oil and gas industry just kind of dying on a vine, particularly exploration and production, yet the petro-chemical industry has incredibly cheap feedstocks because of fracking. That alone is going to bring a lot of manufacturing jobs back to the U.S.

For example, Caterpillar, just a couple of years ago, brought one of its plants back from Japan and built in Florida. Every BMW X series in the world is built in South Carolina, and four models of Mercedes that serve all of North America are built in Alabama. We’re seeing a return of the manufacturing core, and that changes the economic landscape for a lot of people, because no longer do you need a college education to get ahead.

This story was originally published September 30, 2015 at 5:02 PM with the headline "Economist: Commercial real estate the way to go."