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10 reasons to be optimistic about commercial real estate in Southwest Ohio

A picture of Fountain Square in Cincinnati, Ohio
James Flick

1. Fiscal Drag Fades

On December 26, 2013 the Bipartisan Budget Act of 2013 was signed into law. The deal funds the federal government though the fall of 2015. In doing so it removes a layer of fiscal uncertainty that has weighed on the US economy for three years. This news was particularly good for the Dayton region.

The Dayton region is reliant on federal funds. According to a number of sources, 10.1% of all local wages are paid by the federal government. This is due to Wright Patterson Air Force Base. The base employs over 26,000 people and it has an annual economic impact of over $5 billion on the region. When the government did shutdown in October 2013, the base was forced to furlough 8,700 employees. A move that highlighted Trulia's Chief Economist Jed Kolko's claim that Dayton was the 5th most vulnerable city to a government shutdown.

While the impact of a government shutdown is less in Cincinnati, than in Dayton, the removal of fiscal uncertainty from the US economy will help fuel the nationwide economic recovery and boost consumer and investor confidence.

2. Better Balance Sheets

The economic recovery is speeding up and it is showing in the amount of money that both households and companies have on their balance sheets.

In terms of households, the Household Debt Service Ratio, which shows the percent of disposable personal income dedicated to debt and financial obligations, is at its lowest rate in 30 years (10%).

On the business side, thanks to cost cutting measures and sales, corporate profits are at near record levels of $1.2 trillion. The trend of rising revenue growth is projected to continue, but how much is yet to be seen with fourth quarter results still pouring in. Of the companies, with strong local interests, that have reported fourth quarter numbers to date, a number have seen significant gains. They include:

  • Caterpillar: The company operates a 1.5 million square foot distribution center in Clayton and employs approximately 600 local employees. It reported $1 billion in fourth quarter profits, up from $697 million in the fourth quarter of 2012.
  • General Electric: GE’s Aviation division is Cincinnati’s 8th largest employer, employing 7,600 people in the region. The company saw net earnings rise from $4.01 billion in the fourth quarter of 2012 to $4.2 billion to end 2013.

Finally, according to a report in the Dayton Business Journal, many southwest Ohio companies, like Dayton Superior Corp., hope to continue expanding their revenue growth by pursuing opportunities in new and different markets.

As the balance sheets continue to get stronger, so too will the commercial real estate market.

3. Risk of Recession Low

According to the Wall Street Journal Economic Forecasting Survey from January, 2014, the risk of the United States falling into a recession in the next 12 months is down to 11%. This is significantly lower than the 19% risk seen in the January 2013 results. This decline shows that the 50 surveyed economists are growing evermore confident in the strength of the US economy. The lessening risk of recession will only help promote the economic recovery in both Cincinnati and Dayton.

According to the Federal Reserve Bank of Cleveland, Cincinnati is recovering faster than the State of Ohio. The area is poised to experience continued prosperity thanks to significant employment in marketing, healthcare, aerospace manufacturing, auto parts, and other industries that are experiencing strong growth. Additionally, Cincinnati’s educated workforce is an advantage. Challenges the city still faces include adjusting to government cutbacks and declines in manufacturing and construction employment.

Dayton’s recovery may face a steeper uphill climb then Cincinnati’s, but opportunities exist with transportation and logistics, aerospace technology, and UAV development, which is poised to be a $94 billion industry by 2020 and one the Dayton region would very much like a slice of.

4. Job Growth

According to the Bureau of Labor Statistics, the U.S. created approximately 2.2 million jobs in 2013 and in 2012. Over that two-year span, the country saw net employment growth of 182,000 jobs per month. However, the disappointing December 2013 figure of 74,000 jobs was the lowest monthly result in the past two years. Both Ohio and Kentucky saw net employment increases in December, as well as the full year.

Looking ahead, the Pew Charitable Trust forecasts that U.S will generate 2.6 million jobs in the coming year, or an average of over 216,000 jobs per month. The forecast projects Ohio to add 76,420 jobs in 2014, while Kentucky will see an increase of 30,011 jobs.

The Cincinnati and Dayton metros are projected to see a net increase in jobs, according to the PNC Financial Services Group market outlook for all of Southwest Ohio. In 2014, the Southwest Ohio region will see a 1.4% increase in employment. According to the report, this growth is driven mainly by major corporations headquartered in Cincinnati, as well as the region’s diversified service sector.

An often-used barometer of the job market is the unemployment rate. National unemployment (not seasonally adjusted) currently stands at 6.5%, a dramatic year-to-year decrease of 1.1%. Unemployment rates in both Cincinnati and Dayton finished the year near the national mark. Unemployment in Greater Cincinnati dropped from 6.5% in December 2012 to its current 6.2%, while Dayton unemployment rate was unchanged year-to-year at 6.8%.

5. Fed Likes What it Sees

The Federal Reserve is scaling back its monthly bond buying program from $75 to $65 billion. The $10 billion reduction is a sign of growing confidence in the strength of the US economy and its ability to stand on its own.

In early February, Janet Yellen took over for Ben Bernanke as Federal Reserve Chairman. Yellen is the first woman to serve in the position and has been the Vice Chairman of the “Fed” since 2010. She is expected to stay the course, set forth by her predecessor, maintaining low interest rates and further gradual reductions of the bond buying program.

What this means for local businesses is that the current economic conditions, which are driving the recovery, will remain. Users and investors, alike, can continue taking advantage of low interest rates to purchase properties.

Interest rates are extremely important to commercial real estate. According to John Krainer in an economic letter entitled Commercial Real Estate and Low Interest Rates, commercial real estate fundamentals highlight the critical role interest rates play in determining cap rates. Not all of the commercial real estate sectors have seen vacancies and rents recover significantly from the Great Recession. However, office, industrial, retail, and multifamily properties have historically low cap rates in addition to the low interest rates. Krainer argues that the low cap rates suggest that low interest rates are one of the few things helping to support commercial real estate prices. (Multifamily is the exception to this as it is seeing rising rents in addition to the low cap rates.)

In Cincinnati and Dayton, the industrial and multifamily markets have seen fundamentals improve significantly. However, the office markets have been slower to recover and have vacancy rates that remain elevated above pre-recession levels. Just as Krainer observed, despite the weak office fundamentals, sales activity is up, especially in Cincinnati. Each of the last two years the Cincinnati market has seen over $200 million in office investment transaction volume.

The combination of improving fundamentals and the continuance of low interest rates should promote more sales activity and a rise in property values throughout Southwest Ohio.

6. More Confident Consumers

According to the latest release from the Conference Board, the Consumer Confidence Index (CCI) increased 3.2 points to 80.7 between December 2013 and January 2014. At 80.7 the January figure is dramatically better than it was a year ago when it was 58.4.

A rise in CCI is typically followed by a decline in office vacancy two quarters later. With this in mind, the rising CCI serves as a strong indicator that the recovery in the office market will continue and, hopefully, speed up.

In Cincinnati, office vacancy has seen a reduction each of the last 4 quarters, improving 1.19% since the end of 2012. It currently sits at 22.21%

In Dayton the vacancy rate has been steadily decreasing since hitting 28.34% in 2010. At the end of the fourth quarter of 2013 it was 24.80%.

If consumer confidence throughout southwest Ohio follows the positive national trend and remains at a high level, local vacancies should be expected to continue decreasing in the near term future.

7. GDP Getting Stronger

The consensus U.S. Gross Domestic Product 2014 forecast from the NABE (National Association for Business Economics) is 2.8% growth.

As an indicator of local economic strength, a January 2014 study by the U.S. Conference of Mayors, predicts that the Greater Cincinnati’s gross metropolitan product (GMP) will grow by 1.9% in 2014, which is similar to the 2% growth forecast in the Cincinnati Regional and Northern Kentucky Chambers of Commerce Regional Economic Outlook. By comparison, the Dayton area’s GMP is expected to grow by 1.4% in 2014, according the U.S. Conference of Mayors study.

Growth in GDP/GMP should signify continued positive momentum for the commercial real estate market.

8. Tech Cycle Still Has Legs

Venture capitalists invested $7.7 Billion in U.S. tech companies in the third quarter of 2013 and by 2017 it is projected that there will be over 3 billion mobile-connected devices, 2 billion more than exist today.

When thinking about the tech cycle, many don’t think of southwest Ohio, but as a July 2013 article from points out, Cincinnati is a growing center for innovation in tech. The article states, “The metropolitan area… supports a growing community of tech startups through accelerator programs, low business taxes and unemployment, and the connecting power of established companies.”

Cincinnati-based start-ups may not be able to capture the headlines in the way west coast tech start-ups do because they aren’t seeing the same levels of venture capitalist investment. However, it is a strong network of established companies, like Duke Energy and Procter & Gamble, which help facilitate the growth of Cincinnati’s entrepreneurs.

Examples of some of the tech accelerator programs, funding programs, and business support groups in the Cincinnati region include:

As for the City of Dayton, it is the State of Ohio’s Aerospace Hub of Innovation & Opportunity thanks to the work occurring at Wright Patterson Air Force Base, the University of Dayton Research Institute, and other places around the region. Additionally, the Tech Town development combines business support, universities, and government partners to create an environment that encourages technological development and commercialization.

These are all examples of how Cincinnati and Dayton are both poised for growth as technology drives us into the future.

9. America's Energy Boom

Nationally, gas prices have dropped significantly over the past year, with 87-octane gas currently at $3.38/gallon. According to the daily AAA Fuel Gauge Report, the average price of 87-grade gas was $3.75/gallon. Despite the year-to-year drop, seasonal maintenance slowdowns at the nation’s oil refineries have caused prices to jump at least ten cents per gallon within the past month.

Currently, 87-grade gas prices in both Cincinnati ($3.44/gallon) and Dayton ($3.42/gallon) are slightly higher than the national average. Much like the national average, gas prices have also dropped by over thirty cents in the past year. Statewide, the average price of gas in Ohio is $3.42/gallon, placing it in the top third in the nation for high gas prices.

Gas prices in Cincinnati and Dayton, while currently higher than the national average, should also decline near or below the $3.00/gallon point over the next two years.

10. Housing Engine Just Getting Started

Nearly 90% of the 485 total metro areas analyzed by Zillow Real Estate Market Reports experienced cumulative home value gains in between 2012 and 2013. The Cincinnati market experienced a total gain in value of $5.7 billion, for a 2013 cumulative residential home value of over $115 billion.

Locally, the Boards of Realtors in both Cincinnati and Dayton cited substantial gains in year –to-year sales volume, but relatively modest increases in home prices.

According to the Cincinnati Area Board of Realtors, 2013 home sales volume in SW Ohio improved by 20% over prior year. By comparison, the average sale price improved by nearly 6%. A release from the Dayton Area Board of Realtors highlighted that 2013 home sales volume in Greater Dayton improved by 16% over prior year, while the average sale price improved by more than 2%.

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