Just out today is the news that personal income for last month increased 0.2%, meaning that the consumer is doing well which can spur consumer spending which can create demand for commercial real estate development.
Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 billion, or 0.2 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent. In January, personal income increased $26.5 billion, or 0.2 percent, DPI increased $5.0 billion, or less than 0.1 percent, and PCE increased $40.9 billion, or 0.4 percent, based on revised estimates. While a growth in personal income for February 2012 of 0.2% may seem small, it shows the economy continues to stay out of the recession of 2008. The chart below shows personal income by quarter since 2004 and ending 2011.The last 9 quarters have witnessed positive growth.
Positive growth in personal income leads to consumer spending which drives commercial real estate development.
Real gross domestic product (GDP) -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.0 percent in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter), according to the "third" estimate released today by the Bureau of Economic Analysis. In the third quarter, real GDP increased 1.8 percent. The chart below of GDP shows the rapid falloff we experienced in 2008 and 2009 where GDP fell by 8.9%, then we experienced the strongest quarter comeback in the 1st quarter of 2010 with 3.9% growth. This national economic growth is one reason New Orleans commercial real estate picked up in 2011.
4th quarter 2011r means the number was revised. The news out today is for the "third" estimate as seen in the table below. The "third" estimate of the fourth-quarter percent change in real GDP is the same as the "second" estimate issued last month, primarily reflecting a downward revision to exports that was offset by an upward revision to nonresidential fixed investment.
|
Advance Estimate |
Second Estimate |
Third Estimate |
|
| Real GDP |
2.8 |
3.0 |
3.0 |
With good growth in the economy, we should have expanding corporate profits which fuel expansion and new commercial real estate development. It is a domino effect of new industrial facilities needed to meet new demand and new offices needed to house new employees at new locations. As shown in the chart below, coming out of the recession of 2008, corporate profits grew 32% in 2010 over 2009; however, profits grew more slowly in 2011 at 7.9%.
Corporate profits, when measured by quarter in 2011, illustrate a slowing in growth in the 4th quarter from 1.7% to 0.90%, as seen in the table below. This slowdown might put commercial real estate projects on hold until the 1st quarter of 2012 shows us a stronger economy.
| 2011.1 | 2011.2 | 2011.3 | 2011.4 | |
| Corporate profit growth | 1.00% | 3.30% | 1.70% | 0.90% |
| (With inventory valuation and capital consumption adjustments) | ||||
The Bureau of Economic Analysis reported today that Louisiana had growth in personal income of 4.83%, comparing 2011 to 2010, which ranks 34th among all states. The highest growth was North Dakota at 8.13% and the lowest growth was Maine at 3.35%. The reason we examine personal income is because it is a driver of growth for the economy and influences commercial real estate demand. Personal income growth drives commercial real estate demand because it increases consumer discretionary spending which causes retail development which leads to housing development which causes office and industrial development. New Orleans East is a good example of low personal income growth preventing commercial development. It never developed commercially because there were never enough rooftops and discretionary spending; in fact, Lake Forest Shopping Center was losing tenants long before Hurricane Katrina.
In order to get commercial real estate development in areas where there is low personal income growth, you need more population or rooftops. For example both Walgeens and CVS require 20,000 people in their trade area. It also helps to have a City Council Representative that is pro-business.
Personal income is the sum of net earnings by place of residence, property income, and personal current transfer receipts. Property income is rental income of persons, personal dividend income, and personal interest income. Net earnings is earnings by place of work (the sum of wage and salary disbursements, supplements to wages and salaries, and proprietors’ income) less contributions for government social insurance, plus an adjustment to convert earnings by place of work to a place-of-residence basis. Personal income is measured before the deduction of personal income taxes and other personal taxes and is reported in current dollars (no adjustment is made for price changes).
SA1-3 Personal income summary-sorted by 2010-2011 % Change |
||
| Personal income (percent change from preceding period) | ||
| Bureau of Economic Analysis | ||
Area |
2009-2010 |
2010-2011 |
| North Dakota | 9.36 | 8.13 |
| Iowa | 3.1 | 6.81 |
| Texas | 5.3 | 6.64 |
| Oklahoma | 5.28 | 6.21 |
| South Dakota | 4.4 | 6.2 |
| Nebraska | 3.24 | 5.9 |
| Wyoming | 4.06 | 5.88 |
| Colorado | 3.75 | 5.67 |
| California | 3.99 | 5.62 |
| District of Columbia | 5.66 | 5.62 |
| Utah | 3.82 | 5.48 |
| Idaho | 4.01 | 5.4 |
| Tennessee | 4.24 | 5.37 |
| Washington | 2.95 | 5.35 |
| Oregon | 3.2 | 5.3 |
| Michigan | 3.25 | 5.23 |
| Illinois | 2.79 | 5.22 |
| Wisconsin | 3.8 | 5.21 |
| Montana | 4.67 | 5.1 |
| United States | 3.67 | 5.08 |
| Minnesota | 4.45 | 5.05 |
| Connecticut | 2.71 | 5.04 |
| Indiana | 2.47 | 5.04 |
| Massachusetts | 3.64 | 5.03 |
| Georgia | 3.03 | 5.01 |
| Arizona | 2.85 | 4.99 |
| New Hampshire | 2.79 | 4.89 |
| Maryland | 3.96 | 4.88 |
Louisiana |
3.61 |
4.83 |
| Pennsylvania | 3.34 | 4.82 |
| Florida | 3.23 | 4.74 |
| Kentucky | 1.98 | 4.71 |
| Delaware | 3.79 | 4.68 |
| South Carolina | 3.61 | 4.67 |
| Virginia | 3.75 | 4.67 |
| West Virginia | 3.27 | 4.65 |
| Rhode Island | 3.34 | 4.63 |
| Ohio | 2.96 | 4.57 |
| New Mexico | 4.41 | 4.52 |
| Hawaii | 3.67 | 4.49 |
| New York | 4.26 | 4.39 |
| North Carolina | 3.72 | 4.34 |
| Vermont | 3.41 | 4.32 |
| Kansas | 2.71 | 4.3 |
| Arkansas | 3.2 | 4.27 |
| New Jersey | 3.73 | 4.25 |
| Missouri | 2.51 | 4.2 |
| Alaska | 4.48 | 4.17 |
| Nevada | 1.85 | 4.07 |
| Mississippi | 3.81 | 3.85 |
| Alabama | 3.17 | 3.79 |
| Maine | 1.69 | 3.35 |
| Legend / Footnotes: | ||
| All dollar estimates are in current dollars (not adjusted for inflation). | ||
| Last updated: March 28, 2012 - new estimates for 2011; revised estimates for 2008-2010. | ||
Most industrial property owners are shocked to discover the average time it takes to find a buyer or tenant in New Orleans is 368 days, and that is with an average asking price of $37.91 per square foot and lease price of $4.48 per square foot. But there is good news in that, for this month, supply is down. There are 88 properties for sale totaling 2.2 million square feet, which is down about 20% from the average, and 223 industrial properties for lease totaling 3.8 million square feet, down about 14% from the average. The average sale price occured 27% below the list price. The chart below shows the number of days on the market and the lease rate for industrial propeties in the New Orleans MSA, which includes Metairie and Kenner. You can see there is little direct correlation over the last 12 months, which means when lease rates are reduced, it does not cause a shorter number of days on the market, or cause a property to sell or lease faster. In economics, this is called "elasticity".
source: LACDB, market statistics, industrial, new orleans MSA
In 2013 the long term capital gains rate is expected to increase by 58%, so get with your accountant and strategize. While taxes should never be the sole decision to acquire or dispose of commercial real estate - that decision should rely on the economic feasibility of the development - the long term capital gains tax for 2012 is only 15%, and with a government struggling to pay for a recession and wars, capital gains tax rates could go much higher over the next few years.
The 2012 capital gains rate is one of the lowest on record and has been in effect since 2003. You have to go back to 1934 to witness a previous era where capital gains tax rates were 15% or less. As shown below in the "Table of Historical Capital Gains Tax Rates Since 1913", rates have usually been much higher - such as in the late 1980’s when long term capital gains rates were 33% due to the Tax Reform Act of 1986. In 2013 the long term capital gains rate is expected to increase to 20%, plus a 3.8% Medicare Tax, plus Obama’s “Buffet Rule” may increase rates to 30% for millionaires. That increase from 15% to 23.8% is a percentage increase of 58%, so it commands a thoughtful plan.
If you expect your commercial property’s market value will not increase much over the next five years, it might make sense to sell now and pay the 15% capital gains tax rate, rather than sell for the same price in a few years and pay a higher tax rate. In finance terms, the opportunities you would miss by not having that money to reinvest in other projects over that five year period are called "opportunity costs", and smart commercial property owners take into account the future value of any asset that might sit idle for several years. Here's how it works: if you miss earning 5% on an asset valued at $1,000,000 today, you have lost $283,358 over 5 years, because the future value of an asset worth $1,000,000 today will be worth $1,283,358 in 5 years.
Click on the pdf below for a helpful summary from Putnam Company of most of the tax information you need to know: capital gains rates, individual and corporate income rates, retirement plan contribution limits, estate tax rates, social security amount taxed, and FICA tax limits. As always, see your accountant for tax advice.
TABLE OF HISTORICAL CAPITAL GAINS TAX RATES SINCE 1913
Year |
Capital Gains Rate |
1913-15 |
15% |
1916 |
15% |
1917 |
67% |
1918 |
77% |
1919-21 |
73% |
1922 |
12.5% |
1923 |
12.5% |
1924 |
12.5% |
1925-28 |
12.5% |
1929 |
12.5% |
1930-31 |
12.5% |
1932-33 |
12.5% |
1934-35 |
31.5% |
1936-37 |
39% |
1938-40 |
30% |
1941 |
30% |
1942-43 |
25% |
1944-45 |
25% |
1946-47 |
25% |
1948-49 |
25% |
1950 |
25% |
51-64 |
25% |
64-67 |
25% |
1968 |
26.9% |
1969 |
27.5% |
1970 |
32.3% |
1971 |
34.3% |
1972-75 |
36.5% |
1976-77 |
39.9% |
1978 |
39% |
1979-80 |
28% |
1981 |
23.7% |
1982 |
20% |
1983 |
20% |
1984-86 |
20% |
1987 |
28% |
1988-90 |
33% |
1991-92 |
28.9% |
1993-96 |
29.2% |
1997-2000 |
21.2% |
2001 |
21.2% |
2002 |
21.2% |
2003-05 |
16.1% |
2006-07 |
15.7% |
2008-09 |
15.4% |
2010-12 |
15% |
2013-on |
25% |
| Sources: www.taxfoundation.org, www.visualizingeconomics.com,www.seekingalpha.com,www.forbes.com, www.CTJ.org | |
copyright 2012. Louisiana Commercial Realty, LLC.
New Orleans commercial real estate.
