February 9, 2012

Retail Property Sector Defies Expectations

ENCINO, CA-Retail properties performed remarkably well and have a strong potential for an upside surprise despite setbacks to the US economy in the second half of 2011, GlobeSt.com has exclusively learned from a National Retail Report. The report, released by Marcus & Millichap, says that space absorption improved for the ninth consecutive quarter, while construction starts fell to their lowest levels in 20 years.

The report also adds that an anticipated rise in net absorption to 77 million square feet will surpass the 32 million square feet of new supply, tightening the US vacancy rate to 9.2% by year’s end.

“The retail sector’s strong performance defied pundits’ expectations,” says Hessam Nadji, managing director, research and advisory services for the firm. “Retail assets overcame a mid-year plunge, as well as a slide in consumer confidence and a modest contraction in per-capita disposable income.”

Ultimately, Nadji says, core retail sales increased 6.5% by year’s end, with holiday sales growing by 3.8% over 2010. “Private-sector hiring totaled 1.8 million in 2011, with the addition of 466,000 jobs in 4Q,” he says. “Consumers are still under tremendous pressure, but have shown significant resilience amid the financial-market turmoil and recession talk of the past five to six months.”

All 44 markets tracked in the report’s National Retail Index are forecast to post job growth, vacancy declines and effective rent growth in 2012, with San Francisco, San Jose and Seattle ranking at the top of the index. Technology, tourism and strong outlooks for job and population gains will tighten space fundamentals in the five markets that led advancements with seven-spot gains in the national retail index this year, says the report. These include San Jose (#2) and Seattle (#3) with links to technology, strong incomes and low vacancy; Phoenix (#28) and Portland (#6), which advanced on high-tech manufacturing and retail sales; and Miami’s (#14) big decline in vacancy, aided by tourism and low supply.

“Fortress malls, luxury retail stores and well-located grocery-anchored shopping centers in gateway markets, parallel with wholesale clubs and off-price outlets have outperformed the sector,” says Bill Rose, national director of the firm’s national retail group. “Retailers in need of reinvention will continue to downsize or close stores that fail to meet operational hurdles. Limited expansion plans by other retailers must demonstrate substantial value in both market share and profitability to remain viable,” continues Rose.

Retail investment sales increased 32% from 2010 to nearly $61 billion, sparking a 40-basis-point-decline in cap rates to 7.9% on average, says the report. The biggest gains occurred in the $10-million to $20-million property segment, with transaction velocity increasing 98% on a year-over-year basis. Gateway investment markets of New York, Los Angeles, Chicago, Washington, DC, South Florida and Boston dominated sales activity, according to the NRR.

“Accommodative monetary policy will restrain interest rates for the coming year,” says William E. Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp. Furthermore, global investors seeking safety in the midst of ongoing debt crises abroad will migrate to US government debt, which should keep yields low in the mid-term, he says. “CMBS retail loans totaling $1.5 billion will mature in 2012, but many may fail to refinance in the current lending environment because 81% have LTVs exceeding acceptable levels.”

According to Hughes, “Lending for lower-quality, but not distressed assets will ease until economic performance proves out in the first half of the year. While loan assumptions and seller financing will moderate, they will be enough to fill the financing gap.”

Rose adds that “Favorable risk-adjusted returns will be rewarded to those who invest in major mid-American ‘NFL cities,’ while cap rate compression will continue in major coastal MSAs…Clearly, there is no scarcity of liquidity, and real estate fundamentals will continue to spur increased investment sales and finance transactions.”

Can American manufacturing really be cornerstone of economic revival?

For decades, the US manufacturing sector has shriveled, but President Obama now envisions it as an engine of a revived US economy. The basis of his optimism may be hopes for 'advanced' manufacturing.

By Ron Scherer

 

Malta, N.Y.

In this small upstate community, a company called GlobalFoundries is ramping up to produce silicon chips for IBM and other customers.

 

The new plant, which is about the size of six football fields, has hired 1,100 workers in the past two years and plans on adding another 300 this year. Construction workers are still bustling around the $4 billion facility, which has expanded before it's even shipped a silicon wafer – and will eventually be a $7 billion operation.

 

The company is attracting the attention of high-tech companies around the globe. And because the company is more dependent on PhDs than on manual labor, it is an example of where the United States has an advantage over places such as China, where labor costs are so low.

 

The optimism surrounding the plant is emblematic of a change that is taking place from Charleston, S.C., to Detroit: America's manufacturing sector – particularly what is termed "advanced" manufacturing such as that at GlobalFoundries – is starting to come alive.

 

President Obama has made support of US manufacturing an important part of his plan to further an economic rebound. He promoted the sector in his State of the Union message in late January.

True, some commentators continue to question whether American manufacturing can compete in the global economy, especially when so many US jobs have moved offshore. But some policymakers see progress.

"We are the most competitive in manufacturing that we have been for the past two or three decades," said Gene Sperling, director of the National Economic Council, in a session with reporters last month.

A rebound in manufacturing has important ramifications for the US economy. Sixty percent of exports relates to manufacturing, 90 percent of patents, and 70 percent of private-sector research and development. Moreover, as can be seen around Malta, N.Y., the opening of a large manufacturing plant has a big ripple effect in a community: Builders erect new housing, more restaurants open, and more tax dollars come in that can be spent on providing services.

 

"We do believe manufacturing punches above its weight economically," said Mr. Sperling.

The actual number of new jobs in manufacturing is relatively modest, in part because US productivity is so high. Last year, according to the Bureau of Labor Statistics, the economy added about 330,000 manufacturing-based jobs. By way of contrast, some 2.3 million manufacturing jobs were lost in the recession, which officially ended in June 2009.

size of six football fields, has hired 1,100 workers in the past two years and plans on adding another 300 this year. Construction workers are still bustling around the $4 billion facility, which has expanded before it's even shipped a silicon wafer – and will eventually be a $7 billion operation.

 

The company is attracting the attention of high-tech companies around the globe. And because the company is more dependent on PhDs than on manual labor, it is an example of where the United States has an advantage over places such as China, where labor costs are so low.

 

The optimism surrounding the plant is emblematic of a change that is taking place from Charleston, S.C., to Detroit: America's manufacturing sector – particularly what is termed "advanced" manufacturing such as that at GlobalFoundries – is starting to come alive.

 

President Obama has made support of US manufacturing an important part of his plan to further an economic rebound. He promoted the sector in his State of the Union message in late January.

True, some commentators continue to question whether American manufacturing can compete in the global economy, especially when so many US jobs have moved offshore. But some policymakers see progress.

"We are the most competitive in manufacturing that we have been for the past two or three decades," said Gene Sperling, director of the National Economic Council, in a session with reporters last month.

 

A rebound in manufacturing has important ramifications for the US economy. Sixty percent of exports relates to manufacturing, 90 percent of patents, and 70 percent of private-sector research and development. Moreover, as can be seen around Malta, N.Y., the opening of a large manufacturing plant has a big ripple effect in a community: Builders erect new housing, more restaurants open, and more tax dollars come in that can be spent on providing services.

 

"We do believe manufacturing punches above its weight economically," said Mr. Sperling.

The actual number of new jobs in manufacturing is relatively modest, in part because US productivity is so high. Last year, according to the Bureau of Labor Statistics, the economy added about 330,000 manufacturing-based jobs. By way of contrast, some 2.3 million manufacturing jobs were lost in the recession, which officially ended in June 2009.

"Of the 2.3 million jobs lost, not more than half will ever come back," says Dan Meckstroth, chief economist at Manufacturers Alliance for Productivity and Innovation (MAPI) in Arlington, Va. "We may get 1 million more back."

 

Nonetheless, the Obama administration is indeed making manufacturing an important part of its economic strategy for 2012, and possibly beyond. It is asking Congress to remove from the tax code the deduction for moving expenses when a company transfers jobs overseas. At the same time, it's proposing an expansion of the deduction for manufacturing and a doubling of the deduction for advanced manufacturing technologies – from 9 percent to 18 percent.

 

The administration is also proposing a new "manufacturing communities tax credit," which would provide $2 billion per year in incentives for three years to companies that build in a community that has suffered a major job-loss event, such as a plant closing.

 

Mr. Obama covered these points at a Jan. 25 rally at Conveyor Engineering and Manufacturing, a growing manufacturer of giant augers in Cedar Rapids, Iowa. "We've got to stop rewarding businesses that ship jobs overseas [and] reward companies like Conveyor that are doing business right here in the United States of America," Obama said.

 

Even if Congress does nothing, economists expect to see some manufacturing jobs return. For example, the auto industry is expanding production as consumers, driving old models, start to replace their clunkers.

On Jan. 6, Chrysler announced it will add 1,100 jobs at its Jefferson North plant in Detroit, where it makes the Dodge Durango and the Jeep Grand Cherokee. On Jan. 13, BMW announced it would add 300 jobs at its Greer, S.C., plant, and on Jan. 12, Daimler said it would add 1,100 jobs at its truck plant in Cleveland, N.C.

US manufacturers are also benefiting from a 23 percent decline in the value of the US dollar since 2002. The lower value makes US exports more competitive and imports more expensive. "This will be a tail wind for US manufacturers for quite some time," says Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa.

 

Organized labor says it's pleased to finally see a pickup in manufacturing jobs. But as Robert Baugh, executive director of the AFL-CIO Industrial Union Council, observes, the US lost 6 million manufacturing jobs between 2000 and 2011.

 

"Most is internal, people going back to work," he says. "We have no illusions about how deeply the nation has been affected."

 

In fact, there is no question that manufacturing job losses are still taking place. Mr. Meckstroth points to food, beverages, apparel, paper, chemicals, and plastics as industries that are still shrinking. Some consumer-oriented businesses are also struggling, as are those in the housing market.

 

In fact on Feb. 7, a study by the US Business and Industry Council, which argues the Chinese use unfair practices, found that Chinese imports of high tech advanced manufacturing products grew by 16 percent in 2009 and 19 percent in 2010.

 

"Dozens of America’s high value industrial crown jewels are steadily becoming just as vulnerable to Chinese competition as clothing, shoes, and toys,” wrote Alan Tonelson, the author of the study.

But it's apparent the tide has turned in other industries and in some places. In part, that's because of a new paradigm: States and cities are beginning to use their community colleges as an asset as they try to attract business.

 

For example, in Charlotte, N.C., Central Piedmont Community College (CPCC) views itself as the training division for companies looking to hire workers, says Tony Zeiss, president of the school. It has started an apprenticeship program modeled after those in Europe, says Dr. Zeiss.

 

One beneficiary of this is Siemens Energy, which builds gas turbines and uses CPCC to screen potential employees by measuring such things as math skills and the ability to read blueprints.

 

"They ask us what we need, and they custom-design training for that need," says Mark Pringle, director of operations at the company, which plans to add 300 to 400 workers over the next four years. "They [CPCC] make sure the trainees have mastered all the basic skills before we talk to them."

 

Another tack that some manufacturing companies are taking is to get training commitments from state and local governments before a factory is built. That was the case in Charleston, S.C., where the state agreed to spend $45 million to train people to work on Boeing's new 787 Dreamliner production line. That will ultimately result in 3,800 jobs.

 

"Many may be unemployed, and some may be underemployed," says David Ginn, chief executive officer of the Charleston Regional Development Alliance. "They are willing to go on their own time through a pre-employment training program, even though there is no guarantee the company will select them. It allows the company to see if they show up on time, they have the right attitude and work ethic, and they can do a specific task."

 

For many displaced workers, all they want is that foot in the door. For example, in Malta, Alexander Nieminski, a US Navy veteran who has been unemployed for a long time, is enrolled in the Hudson Valley Community College to get a degree in semiconductor manufacturing technology. One day in January, he and other students were in a mock "clean room," similar to what they would expect to find at GlobalFoundries.

"No one has guaranteed me anything," he says while decked out in white clean-room garb from head to toe. "But there are jobs in the region."

 

Since the late 1980s, New York State had wanted to attract high-tech companies to the region, including to Malta, which has a high density of colleges and universities and lots of water and electric power – but not many jobs. "We needed something. We had been having a brain drain for years," says Jim Angus, vice president of the Saratoga Economic Development Corp. (SEDC).

 

By 2000, the state decided to try to lure a high-tech manufacturing company to a large parcel of land in Malta, which had been secretly used by the US government in the 1950s to test rockets. State and local spending ratcheted up to $300 million to add water, sewers, and roads.

 

"The biggest risk is we never knew if this project would go south," recalls Tom Longe, chairman of SEDC.

By 2009, a new joint venture – GlobalFoundries – had made a commitment to build a plant, which is its first in the US. The company reasoned that the nearby community college could help provide workers with some of the skills it needed, and nearby universities such as Rensselaer Polytechnic Institute and the University at Albany could help supply some of the higher-level talent. In addition, the plant would be closer to IBM, a potential customer for its products.

 

"A lot of potential clients also like the fact we are in the US, which has stronger laws on protecting intellectual property," says Travis Bullard, a spokesman for GlobalFoundries.

 

The company figured that building the plant in the US would normally cost about $1 billion more than in other places such as Asia because of long-term issues such as taxes, says Mr. Bullard. But New York State wanted the factory so much that it was willing to invest $1.2 billion – partly in the form of tax credits and refunds. "The state of New York was very aggressive at recruiting us," Bullard says.

 

One reason that New York was happy to get the manufacturing plant: the multiplier effect. For every job inside the plant, Bullard estimates, there are four to five support jobs outside, such as workers who take care of the clean-room clothing. Also popping up are maybe an additional five to six indirect jobs, such as openings in new restaurants. Many of those workers need apartments, grocery stores, and day-care centers. Toward that end, downtown Malta now has construction crews everywhere.

 

"The office space is being leased out even before the buildings are finished," Bullard says.  Even more important, many residents have decided it's not necessary to move to Texas or other places in search of jobs. That's the case for Joe Palladino, who started work six months ago in GlobalFoundries' "ultrapure" water department.

 

"I'm very excited to be in a new industry: It's kind of like entering the auto industry in the 1920s," says Mr. Palladino, who has three children ages 12 to 16. "Being close to home is real convenient, and it looks like a long-term job that someone my age would love."

February 8, 2012

The Coming Opportunity In Industrial Real Estate

First the energy issue. The real damage being done by Obama to the long term prosperity of the country is his anti carbon ideology which translates into killing the Keystone pipeline and severely restricting new drilling and well development. New drilling technology has opened up vast potential for oil and gas development to the extent that the US could be close to or at energy independence in a few years if drilling were to be allowed to proceed in a free market basis. That does not mean there should be a relaxation of rules on fracking or drilling. It means setting a realistic standard for these issues and then letting the free market go to it. The wild hyperbole from Lisa Jackson and the radical environmentalists is simply just that. Unfounded scare statements that the mainstream media picks up and, as usual, does not bother to gather the facts. Reality is there has been almost no contamination from fracking, and the tiny bit has been very contained. Flames are not coming out of faucets. Drinking water has not been contaminated. North Dakota is experiencing a massive economic boom. New York, which is not allowing fracking, is straining to pay its bills. Upstate New York would also turn to a booming economy if Cuomo would allow drilling to proceed. Gas production has caused the price of natural gas to plummet. It is clean and cheap. It is now being used to power trucks. This all means that the cost of fueling manufacturing in the US, and delivering products, has just seen a major cost reduction. Oil is also being found by horizontal drilling and fracking, and this technology is moving the country to a massive new level of domestic reserves never imagined even a few years ago. If you can power trucks with natural gas, then cars can be as well. In time it is possible we will have cheap fuel and minimal pollution using existing infrastructure instead of wasting taxpayer funds on windmills, solar fiascos, and subsidies for electric cars nobody wants to buy.

The Keystone pipeline will provide the US with Canadian oil to supplement the newly discovered reserves in the US, and will, over time, allow us to have true energy independence. In a short time it is likely that Chavez will be dead, or overthrown, and then we will have no need to buy oil from the Arabs. That may be several years away, but it is happening quickly, and if Obama is replaced in November it will happen much faster. The geopolitical ramifications and security ramifications are monumental. Obama is more interested in appeasing some radical environmentalists than in solving for security and economic growth. That is the real cost of Keystone and restricting drilling.

The recession has caused companies to again look at their manufacturing costs and to invest in more technology in the manufacturing process. Labor costs are now well below those of Europe, and when you add in transport costs, technology piracy and Chinese political issues, and the declining cost of gas for power, it is becoming more economic to produce many products in the US. The issue is getting rid of the Obama administration belief in government control of pricing and production. In short, reversing the excessive regulation of business, and the attacks on wealth creation. If we can have a return to a more free market economy, instead of the government regulatory philosophy, then with the coming energy independence, the reduction in production costs through technology, and a reviving economy by 2014, industrial production in the US could see an major upsurge by 2014-15. None of that is a stretch to believe. It will mean a potential for a major new value and development opportunity in industrial buildings. For those of you in that space, your time is coming. You just need to be patient. 

U.S. Commercial-Property Prices to Climb 6%, Green Street Says

By Hui-yong Yu

Feb. 2 (Bloomberg) -- Commercial-property values in the U.S. probably will climb about 6 percent in the next six months, based on recent trading in real estate investment trusts and fixed-income yields, Green Street Advisors Inc. said.

“The increased optimism being expressed by REIT investors and the decreased skittishness evidenced in the high-yield market should eventually find their way into property valuations,” the Newport Beach, California-based research firm said today in a report introducing its Commercial Property Price Forecast. “That’s a notable improvement over the outlook a few months back.”

Property values were little changed during the past several months after a two-year rally that brought them to within 10 percent of record highs reached in 2007, Green Street said in a Jan. 6 report on its Commercial Property Price Index.

Apartment values have been the strongest, while office and lodging properties are still below their past highs, the firm said last month. Office buildings in Manhattan, the largest U.S. market for such properties, are 20 percent below their prior peak, according to Green Street.

--Editors: Daniel Taub, Christine Maurus

Unemployment Rate Falls to Three-Year Low

The job figures outperformed economists’ expectations of only 150,000 jobs created and an unchanged unemployment rate of 8.5%. “There isn’t a lot not to like about this report,” Kevin Thorpe, chief economist with Cassidy Turley tells GlobeSt.com. “November and December figures—which were already strong—were revised up, January data shows job growth is accelerating and unemployment is falling,” Thorpe says. “It blew past even the most optimistic expectations.”

There are too many headwinds remaining to conclude that all is fine, Thorpe adds, “but, my goodness, this is actually beginning to follow the patterns of a real, accelerating recovery.”

For commercial real estate, the employment data signals that fundamentals will continue to strengthen, Thorpe wrote in a client research note released this morning. The manufacturing sector added 50,000 jobs and the retail trade sector added 10,500 jobs for the month. Best of all, the professional & business services sector added 70,000 jobs.

“Job creation has been witnessed disproportionately in the office sector, which is a bullish signal for the national commercial real estate market,” Homa says.

Another positive sign for the office market is the uptick in temporary employment, which is often a precursor to additional growth downstream, Homa continues. “Employers are running near full capacity now and the issues we experienced during the trough of the downturn related to rising sublease inventory and shadow space has gradually become less of an issue,” he adds. Combined with the pullback in new construction, we expect leverage in the market to continue its gradual shift away from tenants and for conditions to become more balanced as the year progresses.”

Unfortunately, Homa goes on to say, even though the unemployment rate has come down substantially in recent months, the national office vacancy rate remains stubbornly high at 17.6%. “The economy has made significant progress in terms of digging out of the recession, and we’ve witnessed seven consecutive quarters of positive net absorption across the country now,” Homa says, “but additional growth is needed to get the office market back to a healthy equilibrium

No More Fear and Loathing of CRE Lending for Banks

Hyperion Catalysis Renews 63,500 SF in Cambridge

House prices hit post-bubble low

By Peter Whoriskey

Supply Shortfall Persists for Apartments

By Dawn Wotapka

2012 CRE Markets: Up, Down or Sideways?

At the recent Commercial Real Estate Finance Conference in South Beach, Miami, Florida, the general consensus seemed to be that both investors and lenders are seeking safety in the deals they are doing. That’s understandable in a market that Moody’s says has fallen about 45% from the peak overall. But there seemed to be no overall consensus about whether the overall CRE market has stabilized or bottomed out yet.

About a third of the folks seemed to think it has stabilized overall and is not likely to fall much further. The optimists focus on the following:

• Financing is available at very low rates for deals provided the deals are based on rational assumptions, including actual leases (not ambitious pro formas), purchase prices that reflect current CRE values.
• Unlike residential real estate, commercial real estate was not generally overbuilt.
• CMBS financing is being retooled to make it more attractive, and various players are starting new lending platforms.
• Life insurance companies have remained important providers of CRE credit.
• They also expect to see continued flows of money into the commercial real estate market, if only to provide an alternative to the very low rates of return offered by bonds and the highly volatile gyrations of the stock market.
• There’s a lot of foreign money seeking a home, and the US remains a safe place to invest for foreign individuals, companies and sovereign funds seeking safety—and willing to take relatively low returns – despite the repeated fiscal and other lunacies of our governmental leaders.

Another third thought the commercial real estate and financing market was very mixed, with the high end properties having stabilized and even risen in value, particularly in top tier markets such as New York City and Washington, D.C. This “middle of the road” group generally thought the market was comprised of three distinct groups of properties:

(a) the top tier properties, which have generally recovered due to a flight to quality in uncertain times,

(b) mid-tier properties generally stabilizing in value; and

(c) lower quality / value add properties falling in value over the past year.

Many in this group see compression in pricing (as measured in cap rates) between the first two categories of properties. Some in this group further opined that various “food groups” of commercial real estate were more in demand, than others, with the least favored type generally being either retail or office, and the generally more favored type being industrial, hotel and other (multifamily, senior housing and other commercial projects). Retail is less attractive due to uncertainty about retailers’ stability in light of the generally poor job market, as well as the perception that new web-enabled buying patterns diminish the amount of demand for retail space. Office is, of course, driven by job growth, which is generally poor across the country other than in a few areas: Washington, D.C., where the government never seems to stop growing, nor do its vendors; New York, where the financial industry has, with significant assistance from the government and taxpayers, made significant steps towards recovery; and Silicon Valley, which is having another tech boom, this one focused on social media and how to monetize it. Some folks in this group note that where, as in the current market, buildings are often priced at less than replacement cost, pointing out that it’s hard to go wrong if you have enough patient equity to stick it out for a while.

The remaining third of the folks I’ve heard seem to be more pessimistic: they are focused on several factors that they think may indicate that worst may not yet be over:

• the ambient uncertainty of an election year;
• the fact that a lot of 5 year loans written in 2007 will become mature this year and may not be refinanceable (primarily due to a shortage of equity to fill the gap between the expiring debt and the new debt available) – which may lead to yet more defaulted CRE loans, more foreclosures and more falling CRE prices (including falling rents spurred by competition from troubled buildings);
• the dismal job market for most Americans, coupled with most Americans’ financial retrenchment;
• capital flow from Europe has slowed significantly;
• the European financial mess may trigger a further economic downturn if it turns out a lot of US banks and financial institutions are enmeshed contractually in dealings with European banks and businesses;
• the lack of “B” piece buyers limit the size of the potential CMBS market, as do some of the conflicts and other difficulties in servicing CMBS loans;
• the looming threat of further economic slowdowns caused by oil price spikes, commodity price hikes or geopolitical disturbances.

I tend to think that we’re bumping along the bottom now, like the middle group, but with a somewhat more pessimistic bias. It seems to me that we are seeing very thoughtless discussions about our collective national priorities and finances (as part of the political silly season) at a time when we have the need to balance our inherited privileges as Americans against our responsibilities to right our civic ship so that it can sail on for a long time for the benefit of our citizens.

This requires both moderating our spending and raising enough tax income to pay our way as we go (or to move towards doing so). It also requires a realistic reappraisal of our role in the world: do we really have the resources and desire to be the world’s policeman? Do we want to leave trade barriers so low that our economic competitors can take all our manufacturing business, and with it both the jobs of many of our citizens and the upside potential of technological advances that come most frequently through tinkering with the manufacturing process? Do we want to provide access to our markets for goods produced in ways and using power that is polluting the world at an increasing rate? What safety net do we want to provide to our fellow citizens – or do we want our fellow citizens to be at risk of ruin from unpredictable health care or predictable old age -- and how do we expect to pay for it?

Unfortunately, the quality of the debate on public issues by our would-be political leaders strikes me as ranging from hopelessly irrelevant to silly to grossly negligent. With so few attempts to build consensus for rational and responsible societal answers to the seemingly intractable problems we face as a country, I think the likelihood of a government-induced or aggravated “Black Swan” event is high, and so personally tend to be more on the pessimistic side concerning the likely changes to the CRE markets for 2012. What about you? Do you agree or disagree? It would be interesting for the GlobeSt.com readers to weigh in with your thoughts.

Top Cities for Investment to Spread by 2020

The study is part of the locally based company’s “World Winning Cities” research program launched in 2002 to understand trends in urbanization and asses impacts on global real estate markets. One of the first things learned, says Jeremy Kelly, the author of the recent “New World of Cities” study, is that the top markets don’t normally change much over time. “The top 10 stay pretty consistent,” he tells GlobeSt.com, and says even the other 20 haven’t given much ground.

The top 10 cities in terms of direct commercial real estate investment from first quarter 2010 to third quarter 2011 were, in order, London, Tokyo, New York City, Hong Kong, Paris, Singapore, Washington, DC, Seoul, Toronto and Shanghai, Kelly says. Regardless of the European debt crisis, London, which doesn’t belong to the Eurozone countries, saw $43 billion of investment in the time period, $11 billion more than Tokyo and $16 billion more than New York City.

“Many European investors are rebalancing their portfolios by investing in London,” Kelly says. “Virtually every international country is looking to invest in the city.”

However, over the next decade, investors are expected to spread out investment, Kelly says, as globalization picks up pace. By 2020, he says, the top 30 is more likely to be the top 50 as cities such as Mexico City, Delhi and Istabul attract more investment.

More Chinese cities, with only Shanghai and Beijing (12) on the list now, are expected to break into the top 30, including Chongqing, Tianjin and Chengdu. The world’s 10 fastest growing large cities are all in China, Kelly says.

However, more US cities are also expected to join the top 30 list. Currently along with New York City and Washington, DC, only Los Angeles (11), Chicago (14), Boston (18) and Miami (28) are in the top 30 for investment. Eleven US cities are expected to feature among the world’s largest cities by GDP by 2020, according to the report.

“The US cities are large markets featuring transparency and liquidity not seen in other markets,” Kelly says. Houston and Dallas have seen impressive GDP growth, he says, and Austin and Raleigh-Durham will be popular due to growth in technology.

2012 Could Be Multifamily’s Best Year

In the opening session moderated by Mark Obrinsky, NMHC’s vice president of research, Jay Lybik, vice president of market research for Equity Residential, and Ron Witten, president of Witten Advisors, discussed what’s next for apartment recovery.

The decline in the homeownership rate has benefited the sector, but not to a great extent. These days, it’s demographics and household formation that are driving demand for apartments. And even if the for-sale housing market improves, the ownership rate likely won’t hit the 69% peak again but rather, stay in the 64% to 65% range. Additionally, young adults—especially single women—are putting off marriage and home purchases in favor of renting.

Still, without economic growth, demographics only go so far. The good news, the speakers noted, is that 60% of the job growth that’s occurred in the past two years has been among 20- to 34-year-olds. And while jobs are growing, incomes aren’t; one speaker noted that whereas the average 30-something male earned $40,000 in the 1970s, today he’s more likely to earn $35,000. Add to that student loan debt—averaging $25,000 for recent grads—and the pressure on young adults intensifies. That may make it more difficult for them to pay high rents, but it also means they won’t be able to purchase a new home, either.

The other market positive is its supply. Some 120,000 units are lost every year because they are obsolete or were converted, and due to minimal new deliveries for the past two years, total inventory has actually decreased. According to the analysts on the panel, the industry needs to produce 250,000 to 300,000 units to meet the demand.

Developers may start chipping away at that number in the near future, according to speakers on the financing panel, who observed that there’s pressure building up among commercial banks to get back into construction lending for apartments. The session, moderated by CBRE Capital Markets president Brian Stoffers, featured Scott Anderson, senior director and head of multifamily real estate asset management for TIAA-CREF; McKinley CEO Albert Berriz; Brad Blash, chief business officer for Crossbeam Holdings; NorthMarq Capital CEO Ed Padilla; and Michael Tompkins, managing partner for TriBridge Residential.

Yet while they may be more inclined to lend, Blash said banks will be very selective with markets and borrowers, and won’t rush into secondary or tertiary markets. He indicated that Crossbeam is looking at “smart” secondary markets with healthy household formation, such as Nashville, Portland, OR and Raleigh, NC. Berriz, meanwhile, said McKinley favors tertiary markets like Augusta, GA; Columbia, SC; and Norfolk, VA, which have strong education or military industries.

The panelists stressed that the Fannie and Freddie are critical to the apartment market, where they’re actually seeing great success; since their takeover, the GSEs’ multifamily programs each made about $1 billion. However, issues at each institution’s leadership remain a concern.

Citi, Wells Report Best Loan Demand Since 2008 Crisis

By SUZANNE KAPNER

 

Big U.S. banks are reopening the lending spigot amid signs that an improving economy is spurring companies and individuals to borrow more.

On Tuesday, Citigroup Inc. and Wells Fargo & Co. recorded their strongest loan-growth numbers since the financial crisis. The figures confirm a warming trend highlighted Friday by J.P. Morgan Chase & Co.

The lending gains mark a change from the past few years, when lackluster figures opened the banks to criticism from politicians and others that the firms' tight grip on their cash was keeping economic growth under wraps. Banks responded that, after the bursting of the credit bubble that led to the financial crisis, consumers and companies were unwilling to borrow.

 

The data offer the latest signal that the deleveraging that swept the economy following the 2007-08 turmoil may be easing.

 

"Companies that are credit-worthy haven't been in a borrowing mood, but we are starting to see that change," said Jeffrey Harte, a principal with Sandler O'Neill + Partners LP.

 

At Citi, retail-banking loans rose 15% from a year ago to $133 billion, as the New York bank lent more to individuals and local businesses. At San Francisco-based Wells, commercial and industrial loans rose 11% from a year earlier to $167 billion at Dec. 31, amid what Chief Financial Officer Tim Sloan called broad-based growth.

 

All told, loans outstanding at the companies and J.P. Morgan rose by $41 billion from a year ago in the fourth quarter, to $2.14 trillion. That's the first increase for the three giant lenders since 2008, when crisis-related acquisitions led to big expansions at J.P. Morgan and Wells Fargo. Bank of America Corp., the second-biggest U.S. lender after J.P. Morgan, is due to post its fourth-quarter numbers on Thursday.

 

The expansion is good news for the U.S. economy at a time when unemployment remains high and investors are fretting about the prospect of an economic downturn or market shock spurred by Europe's debt crisis. Increased credit availability stands to help U.S. businesses that have been looking to finance new growth.

Demand is "everywhere," J.P. Morgan Chase Chief Executive James Dimon said during a conference call last Friday. "Industrial, consumer, Asia, Latin America, trade finance, corporations, all types of corporations."

 

The lending pickup is a bright spot in a mostly dour big-bank earnings season featuring declining revenue and mixed profits. Big U.S. financial firms are under pressure in the markets as weak economic growth, tighter regulation and a decline in trading and deal making crimp their earnings outlooks. Citigroup stock fell 8.2% on Tuesday following its weaker-than-expected fourth-quarter earnings report; Wells Fargo edged up 0.7%.

But strong lending growth, as long as the loans are of high quality, should boost earnings in coming years.

"From what we can see so far, there is actual demand for loans, as opposed to banks going down the credit spectrum and loosening their standards," Sandler's Mr. Harte said.

 

The lending gains are being driven in part by a retreat by European lenders tied to the region's debt crisis. As banks on the continent sell assets to raise capital and reduce their dependence on scarce dollar funding, big U.S. lenders are stepping in. Mr. Dimon said on Friday that "a little bit" of the bank's lending increase can be attributed to a pullback in lending by hobbled European competitors.

 

The banks' numbers aren't the only source of positive signs for the economy. Household borrowing on credit cards, car loans, student loans and other kinds of installment debt rose at a 9.9% seasonally adjusted annual rate in November, the Federal Reserve said this month, marking the fastest monthly increase since November 2001.

 

At Citigroup, corporate loans surged 24% from a year ago to $219 billion. Another bright spot was trade finance—the management of money, credit and investments for large corporations; Citigroup was able to increase this type of lending by 50% in the period, as it picked up share from European banks that are paring back as a result of the region's debt crisis.

 

"In the fourth quarter, we began to see some good demand for loans pretty much spread around the world," Vikram Pandit, Citigroup's CEO, said on a conference call with analysts and investors on Tuesday.

 

J.P. Morgan's total loan book was up 4% during the fourth quarter, as lending to middle-market and corporate banking clients rose 12% and loans retained by the investment bank were up 28%. Executives said the latest-quarter gain would have been 9% if the firm hadn't been allowing loans tied to its 2008 acquisition of Washington Mutual Inc. to run off, or mature without being replaced by new loans.

"I believe you are seeing real loan growth," Mr. Dimon said.

 

At Wells Fargo, commercial and industrial loans rose 11% from a year ago, while commercial real-estate lending rose 6.6%. The figures were boosted by loan purchases, particularly from retrenching European lenders, which CEO John Stumpf said would continue. The bank recently purchased loan portfolios from Allied Irish Banks and Bank of Ireland, both of which are retrenching following government bailouts.

But the European shake-out is far from the only driver of loan growth.

 

Ronald Duffy closed last Friday on a $600,000 loan from Wells Fargo that he says he will use to a buy a laser-cutting machine for his company, Laser Cutting Services in Tualatin, Ore. He expects the new machine to allow him to take on more capacity at lower rates.

 

"The banks had been very tight-fisted, and they are still being extremely cautious," Mr. Duffy said. "But they are lending to companies that they consider to be an acceptable risk."

—David Benoit and Dan Fitzpatrick contributed to this article.

The Fed's report shows that the pace of economic activity around the country is picking up, with the exception of the housing market.

By CRAIG KARMIN And ELIOT BROWN

 

Penn Mutual Towers, an office complex across the street from Independence Hall in Philadelphia, has seen its vacancy rise and income fall after one big tenant left and another renewed its lease for 15% less than it had been paying. Its creditors are foreclosing on the property, according to data company Trepp LLC.

 

Similar problems are mushrooming in office markets throughout the country, foreshadowing a new wave of real-estate trouble.

 

While the housing market was at the heart of the most recent real-estate crisis, office buildings—the center of past meltdowns—until now haven't been a major source of concern.

But many owners who have been able to keep their heads above water are being undone by tenant contractions and the expiration of five-year leases that were signed at the peak of the boom.

 

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.

 

Defaults and foreclosures are rising. The delinquency rate of office loans that were securitized hit 9% in December, up from 7.4% in June.

 

Analysts expect the rate to keep rising. Meanwhile, the delinquency rate of other asset classes like apartments and hotels has begun to fall, according to Trepp.

 

"These people have turned into zombie landlords," says Kevin Traenkle, a principal at Colony Capital. "They have been able to service mortgages with rents that are above marketplace today. When those rents roll, they will get a much lower number."

 

Problems are particularly acute for owners that purchased or refinanced buildings near the top of the market.

BentleyForbes Group LLC bought Atlanta's Bank of America Plaza in 2006, putting a $363 million mortgage on the property. At the time, the 55-story tower was 99% leased, and Bank of America Corp. was the anchor tenant.

 

Last year, the bank reduced its space by more than half to 139,000 square feet, according to Trepp. That, and other departures, left the building 37% vacant and its income down more than 25% from the time of purchase. In the fall, BentleyForbes defaulted on its mortgage.

 

Brent Ware, a BentleyForbes executive, said his firm is working on a plan "that will stabilize the tower's underlying long-term capital structure."

 

To be sure, office vacancy rates have slowly improved in some markets as companies added jobs, and owners will benefit even more if the economy gains steam. Also, values of office property have increased in New York, Washington, Boston and other major cities, easing the stress on some properties.

 

But the rise in value has been primarily due to the capital markets climate, in which low interest rates are convincing yield-hungry investors to switch to real estate. Rents and occupancy rates haven't risen nearly as much as values have and, in almost all markets rents are still far below what they were in 2007.

 

For example, in New York, values of some office buildings are approaching boom-era highs, especially properties that are mostly occupied by credit-worthy tenants on long term leases. But six out of seven New York City's submarkets all have effective rents-which includes landlord incentives—down 15% or more since end-2007, according to Reis.

 

Because most investors relied heavily on borrowed money, even a very modest reduction in rent could hurt a building owner. For instance, a 1% decline in rent this year would result in an 8% loss of profits if the building owner used 80% leverage, according to CoStar Group Inc. With 95% leverage, that profit loss soars to 50%.

For tenants looking for space, this is good news. In many cities, they are enjoying rent cuts when they sign renewals. But the number of loans being scrutinized for possible problems has been steadily swelling as landlords have to reach deeply into their pockets to pay incentives and brokerage commissions.

 

A 660,000 square-foot office building in downtown Kansas City, Mo., is trying to renegotiate its $40 million mortgage with creditors, according to Trepp. The property's vacancy rose to 48% in 2010 when a major tenant, Dickinson Financial Corp. didn't renew its lease.

 

At Penn Mutual Towers, a complex of three connected buildings, a receiver has been put in place, and the servicer of the $102 million mortgage is taking control of the property, according to a Trepp. Loeb Partners Realty, the owner, couldn't be reached for comment.

 

Write to Craig Karmin at craig.karmin@wsj.com and Eliot Brown at eliot.brown@wsj.com

Hotel room prices rise 4.3% in 2011 by Hugo martin, LA Times

Los Angeles hotels, however, post a 2.4% decrease. Rates are expected to rise nationwide as travel in the U.S. grows, creating more demand for hotel rooms.

With business and leisure travel growing, the average price for a hotel room rose 4.3% nationwide last year and is expected to climb further this year, helping the industry rebound from the Great Recession.

The higher rates also reflected the limited growth in the number of new hotels, according to industry analysts.

Last year's increases and this year's projections came in separate studies that looked at hotel bookings over the last year and advance bookings into the next nine months.

At the end of December, hotel rates nationwide were up 4.3% from a year earlier, to an average daily rate of $107.56, according to a study released Friday by STR Global, a hotel research firm in Nashville.

The number of hotel rooms in the U.S. grew only 0.6% last year, said Jan Freitag, senior vice president at STR. In contrast, the hotel industry added rooms at a rate of 2.2% a year over the last 20 years, he said.

Fewer hotels were built last year because banks were more reluctant to finance hotel construction, he said.

"The limited number of rooms gave the hotels pricing power," Freitag said.

The only double-digit increase in rates for the final week of December — up 11% from a year earlier — was in the San Francisco-San Mateo area, where the average daily rate was $135, according to STR. Los Angeles posted the largest rate decrease, a drop of 2.4%, that left the average daily rate at $119.12.

Hotel rates are expected to climb 3.6% this year as demand continues to grow, according to the study by TravelClick, a New York company that provides booking software and business data for major hotel chains worldwide.

That study listed only percentage forecasts and not daily rates.

The rebound in the hotel industry is being boosted by the continued resurgence of business travel, which generates the lion's share of revenue for large luxury and upper-scale hotels.

"The business-travel segment continues to be strong," said Tim Hart, executive vice president for business intelligence solutions at TravelClick.

For more than three years, hotel rates have been a moving target. They dropped for 18 straight months starting in fall 2008, pushed down by slumping demand during the recession.

Business travel sank as corporations seeking government bailouts and facing massive layoffs slashed travel budgets.

In California, the number of hotels in foreclosure more than doubled in 2010 to 138 properties. Analysts said the increase in foreclosures came about because hotel owners took out expansion and renovation loans in the mid-2000s. When the recession hit and demand dropped, hotel owners had trouble repaying the loans.

Hotel rates started to climb in spring 2010 as Americans started to travel more.

This year, demand should be higher in such cities as Charlotte, N.C.; Detroit; Indianapolis; Houston; and Miami, according to TravelClick. The rates in those cities are expected to climb 3% to 5%.

In California, demand is expected to grow about 5% in Los Angeles and San Diego, and nearly 4% in San Francisco. Meanwhile, the average daily rates are expected to jump nearly 2% in Los Angeles, 1% in San Diego and 11% in San Francisco, according to TravelClick.

'Renter Nation' rages on as new reality in U.S.  By Diana Olick

Despite record low mortgage rates and rising affordability in most U.S. housing markets, rent is the new reality for former home owners and new households alike.

For some it is post-traumatic stress from the housing crash, for others it is the inability to get financing to buy a home. Either way, the rental market continues on its tear.

In the last quarter of 2011, the apartment sector saw its largest quarterly increase in occupied stock of the year, according to Reis Inc.

The vacancy rate dropped to 5.2%, the lowest since 2001 and lower than the last cyclical drop in 2006.

This bucks the historical seasonal weakness typical of the colder months of the year. The fourth quarter also tends to be a weaker leasing period, according to Reis, given that most households make moving decisions in the second and third quarters.

This surge in occupancy pushed asking and effective rents up 0.4% and 0.5% respectively, which Reis calls the only disappointing figures for the sector, missing expectations. Reis blames that on slow economic growth and still high unemployment.

"Higher quality properties in the most desirable locations posted rent gains in excess of 5-10%, while class B/C properties, catering to lower income tenants, found it relatively more difficult to raise rents," notes Victor Calanog, head of research at Reis.

Nowhere is that more evident than in the Washington metro area where rents are way up across the city, and developers are rushing to erect new multi-family buildings and rehab old ones.

"Everybody wants to be in D.C.," beams Richard Key, district manager for Camden Property Trust, one of the largest publicly traded multifamily REITs in the nation. "Whereas in other markets there are deals, when you get to DC area, all the REITs want to be here, and so we're all competing for the same piece of land, and that's driving the price up. That is really is a challenge for us."

Key is convinced that there has been a fundamental shift in attitudes toward home ownership that will last for several more years. He is not concerned that the pendulum will swing back to buying, just as all that new rental stock hits the market around 2014. Camden has seen rents on its DC properties rise over 5% in just the past year.

"The nice part is we haven't seen a drop in occupancies with that rent growth, and so the hope is that we're able to maintain our historical occupancies and continue to see that five, six, gosh, seven percent is not out of the question in the next couple of years," says Key.

Washington will likely see those higher rents because home prices didn't fall very high during the housing crash and are already rebounding. It and Detroit were the only major markets posting annual gains on the latest S&P/Case-Shiller Home Price Index.

In other markets like Las Vegas, where home prices are rock-bottom thanks to a huge supply of foreclosures, the rental market is tougher for developers and landlords.

As for renter society, it is also being fueled by tight mortgage underwriting. Rates may be at record lows, but only if you can get them. In a paper released Wednesday, Federal Reserve Chairman Ben Bernanke noted, "Continued efforts are needed to find an appropriate balance between prudent lending and appropriate consumer protection, on the one hand, and not unduly restricting mortgage credit, on the other hand."

Until that balance is found, potential home buyers will stay on the sidelines, those sidelines being rental apartments. A new twist to watch, however, may be that rental nation will go single family.

With so many bank owned homes left to clear, and so many in government and the private sector looking at bulk rental investments, apartments may have big competition in the same neighborhoods where they used to compete against single family buyers.

For Malls, Occupancy Firms Up by Kris Hudson 

U.S. malls and shopping centers experienced a slight improvement in occupancy during the fourth quarter, a relief for landlords that have been battling lackluster demand from retailers for most of the downturn.

But data service Reis Inc. cautioned that any recovery remains precarious and the outlook for this year is mixed, given the clouds hovering over the economy. While some retailers are expanding—such as Forever 21 Inc., Dick's Sporting Goods Inc. and Dollar General Corp.—landlords can expect more headaches from high-profile store closures by companies such as Sears Holdings Corp. and Gap Inc.

 

"It's too soon to pronounce a turnaround at this point," said Victor Calanog, chief economist at Reis, which is based in New York.

The fourth quarter typically is the strongest for retail landlords as well as their tenants. Still, the fourth quarter of last year was one of the strongest since the recession hit, in terms of rising rents and occupancies.

 

Malls in the top 80 U.S. markets posted an average vacancy rate of 9.2% in the quarter, down from the 11-year high of 9.4% in the third quarter, according to Reis, which began tracking mall data in 2000. Mall vacancies had been climbing steadily for most of the downturn since 2007, when the vacancy rate fell as low as 5.5%.

Demand for space at neighborhood and community shopping centers also strengthened in the quarter, with stores occupying an additional 3.1 million square feet in the top 80 markets. Because of new construction, vacancy in this category remained at 11%, where it has been for three quarters, a level last seen in 1991.

At Brixmor Property Group Inc., owner of 621 shopping centers across the U.S., average occupancy increased to 88.1% last year from 87.6% in 2010. Michael Carroll, Brixmor's president and chief executive, said Brixmor signed leases in the fourth quarter with retailers such as Kohl's Corp., Wal-Mart Stores Inc., Ross Stores Inc., Petco Animal Supplies Inc. and Ulta Salon, Cosmetics & Fragrance Inc.

 

Owners of retail property have been hit hard during the downturn by overbuilding, consumer caution and competition from online shopping. In the three years covering 2008 through 2010, retailers at neighborhood and community shopping centers vacated a total of 31.6 million square feet, according to Reis.

 

But the most recent quarter's results indicate that the worst might be over, especially with the economy adding jobs. A decent holiday shopping season also gave the retail property sector a boost, with 23 national chains reporting an average sales gain of 3.4% in November and December at stores open at least a year, according to Retail Metrics Inc.

 

"Fourth-quarter sales outpaced [retailers'] expectations," said Naveen Jaggi, senior managing director of retailer service at brokerage CB Richard Ellis Group Inc. He said retailers are "cautiously optimistic" about this year.

The average annual rent at U.S. malls rose to $38.92 a square foot in the fourth quarter, a 0.3% increase from the third quarter and the second consecutive quarterly gain, according to Reis. Mall rents had been mostly flat or declining since 2008.

 

Average annual rents at U.S. strip centers increased 0.1% in the fourth quarter to $19.04 a square foot after 13 consecutive quarters of remaining flat or declining.

 

Retail landlords also have been helped by a virtual shutdown in new store construction, meaning they face less competition for tenants. Only 4.5 million square feet of shopping-center space opened in 2010, the lowest figure in 31 years, according to Reis. Last year was slightly higher, with only 4.9 million square feet being delivered.

 

"That's giving the sector some time to actually recover," said Reis's Mr. Calanog. 

PwC Real Estate Investor Survey Q4 2011

NAR’s 2012 Commercial Forecast Shows Improvements
The third quarter brought positive news to commercial real estate, but economic concerns continue to stymie a robust commercial real estate recovery, the National Association of Realtors reported Dec. 30 in its December 2011 Real Estate Insights report. However, improving fundamentals mean a more positive trend is expected in 2012.

“Vacancy rates are expected to trend lower and rents should rise modestly in 2012,” George Ratiu, NAR manager, quantitative & commercial research, said in the report. “In the multifamily market, which already has the tightest vacancy rates in any commercial sector, apartment rents will be rising at faster rates in most of the country next year. If new multifamily construction doesn’t ramp up, rent growth could potentially approach 7 percent over the next two years,” Ratiu said.

 

Vacancy rates in the office sector are expected to fall from 16.7 percent for the fourth quarter 2011 to 16.1 percent for the fourth quarter 2012. Currently, the lowest office vacancy rates are in Washington, D.C., at 9.3 percent, New York at 10.3 percent and New Orleans at 12.8 percent.

 

After rising 1.4 percent in 2011, NAR forecasts that office rents will increase an additional 1.7 percent in 2012. Net absorption of office space is projected to total 20.2 million square feet in 2011 and increase to 31.7 million in 2012.

 

Industrial real estate vacancy rates are projected to decline from an expected 12.3 percent for the fourth quarter 2011 to 11.7 percent for the fourth quarter 2012, according to the report. Areas with the lowest industrial vacancy rates are Los Angeles at 5.2 percent, Orange County, Calif., at 5.7 percent and Miami at 8.4 percent. NAR forecasts that annual industrial rents should increase 1.8 percent in 2012. Net absorption of industrial space nationally should fall to 41.2 million in 2012, down from 62 million square feet in 2011.

 

Retail vacancy rates are likely to decline from 12.6 percent for the fourth quarter 2011 to 11.8 percent for the fourth quarter 2012. Markets with the lowest retail vacancy rates include San Francisco at 3.7 percent, Long Island (N.Y.), at 5.7 percent, Northern N.J., at 5.7 percent and San Jose, Calif., at 6 percent. NAR expects average retail rents to rise 0.7 percent in 2012. Net absorption of retail space should total 1.2 million square feet in 2011 and increase to 13.5 million in 2012.

 

The multifamily housing market is projected to see vacancy rates drop from 5 percent for the fourth quarter 2011 to 4.3 percent for the fourth quarter 2012. Average apartment rents are projected to rise 3.5 percent in 2012. Multifamily net absorption is likely to total 238,400 units in 2011 and 126,600 units in 2012.

 

Areas with the lowest multifamily vacancy rates are Minneapolis at 2.4 percent, New York at 2.7 percent and Portland, Ore., at 2.8 percent. According to NAR, multifamily vacancy rates below 5 percent are generally considered a landlord’s market with demand justifying higher rents.

January 2, 2012

Investors see commercial real estate as a good bet

Despite the economy, investors are bullish on the prospects for office buildings, the largest commercial real estate sector, a survey finds. Apartments are viewed as the most favored category.

Backtracking U.S. Lawmakers Expand Federal Role in Mortgages

The Outlook for Commercial Real Estate (2012 - NAR)

By George Ratiu, Manager, Quantitative & Commercial Research

The economy – not to mention the commercial real estate sector – is looking for some sparkle this holiday season. While the third quarter brought some positive news to commercial real estate, economic concerns continue to hold back a robust commercial real estate recovery. Still, while commercial real estate markets have been relatively flat this year, improving fundamentals mean a more positive trend is expected in 2012.

Let’s look at the overall economy first. Based on the Bureau of Economic Analysis’s second estimate, gross domestic product (GDP) rose 2.0 percent in the third quarter. Mirroring the second quarter’s patterns, all major components advanced, except government spending. The major driver of economic growth – consumer spending – remained steady growing 2.3 percent during the third quarter. Business investments provided a double-digit boost behind the economic advance. Business spending rose 14.8 percent during the quarter. Businesses have accelerated spending with each successive quarter during 2011. Businesses upped their spending on equipment— transportation was up 31.7 percent while spending on industrial equipment rose 31.6 percent. Notably, spending on commercial real estate gained for the second consecutive quarter, advancing 12.6 percent.

International trade, which has proven resilient this year, continued to expand during the third quarter. With exports rising by 4.3 percent and imports growing by 0.5 percent, the balance of trade was positive. However, along with growth in trade, prices of exchanged goods also increased. Import prices, in particular, have been growing at double-digit rates for the better part of 2011, with September’s prices 13.4 percent higher year-over-year. Export prices rose at a much slower pace, with September 2011 figures up 9.5 percent from the prior year.

On the employment front, there’s still a lot of room for improvement. The number of payroll jobs rose by 368,000 during the quarter. Businesses cite general uncertainty, lack of demand and regulatory concerns as the main reason for modest hiring. Still, manufacturing, construction and mining maintained a steady pace of growth. Another positive sign: professional and business services posted a net 100,000 new jobs during the quarter. The other contributors to employment growth were the education and health sectors.

Commercial Markets

According to NAR’s latest Commercial Real Estate Outlook, there was little change in most of the commercial market sectors in the third quarter of this year. Vacancy rates continue flat, leasing soft and concessions continue to make it a tenant’s market. But the commercial real estate market is expected to follow the general economy, and NAR foresees continuing, albeit modest, improvement. Vacancy rates are expected to trend lower and rents should rise modestly next year. In the multifamily market, which already has the tightest vacancy rates of any commercial sector, apartment rents will be rising at faster rates in most of the country next year. If new multifamily construction doesn’t ramp up, rent growth could potentially approach 7 percent over the next two years.

Office Markets: Vacancy rates in the office sector are expected to fall from 16.7 percent in the current quarter to 16.1 percent in the fourth quarter of 2012. Currently, markets with the lowest office vacancy rates are Washington, D.C. (9.3 percent), New York City (10.3 percent) and New Orleans (12.8 percent). Office rents rose 1.4 percent in 2011, and are expected to increase another 1.7 percent in 2012. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be 20.2 million square feet this year and 31.7 million in 2012.

Industrial Markets: Industrial vacancy rates are projected to decline from 12.3 percent in the fourth quarter of this year to 11.7 percent in the fourth quarter of 2012. The areas with the lowest industrial vacancy rates currently are Los Angeles, CA with a vacancy rate of 5.2 percent; Orange County, CA at 5.7 percent, and Miami at 8.4 percent. Annual industrial rent is forecast to rise 1.8 percent in 2012. Net absorption of industrial space nationally should be 62.0 million square feet this year and 41.2 million in 2012.

Retail Markets: Retail vacancy rates are likely to decline from 12.6 percent in the current quarter to 11.8 percent in the fourth quarter of 2012. Markets with the lowest retail vacancy rates include San Francisco, CA (3.7 percent), Long Island, NY and Northern New Jersey, each at 5.7 percent, and San Jose, CA at 6.0 percent. Look for average retail rent to decline 0.2 percent through the end of this year, and then rise 0.7 percent in 2012. Net absorption of retail space is expected to register 1.2 million square feet this year and 13.5 million in 2012.

Multifamily Markets: This sector has been the performer over the past year, and will continue to perform well in 2012. The apartment rental market – multifamily housing – is expected to see vacancy rates drop from 5.0 percent in the fourth quarter to 4.3 percent in the fourth quarter of 2012; multifamily vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents. Areas with the lowest multifamily vacancy rates currently are Minneapolis at 2.4 percent, New York City, 2.7 percent, and Portland, OR at 2.8 percent. Average apartment rent is projected to rise 2.5 percent this year and another 3.5 percent in 2012. Multifamily net absorption is likely to be 238,400 units this year and 126,600 in 2012.

For more information

NAR Research monitors and analyzes monthly and quarterly economic indicators, including retail sales, industrial production, producer price index, gross domestic product and employment data that clearly impact commercial markets over time. In addition, NAR Research provides several products covering commercial real estate including an annual Commercial Member Profile, the Commercial Real Estate Quarterly Market Survey, and the Commercial Real Estate Lending Survey. These reports, as well as the complete Commercial Real Estate Outlook, are available at www.realtor.org.

NEW YORK CITY-As investors continued their flight-to-quality in core markets throughout 2011, investors predict that the new year could shine a light on a longstanding dark spot in the CRE community: secondary office markets. According to fourth quarter results from Pricewaterhousecoopers’ Real Estate Investor Survey, investors said buying opportunities beyond core markets remains “tricky,” but expectations for tenant retention and rent growth within the office sector remains high.

Based on these responses, Mitch Roschelle, partner of the US real estate advisory practice at PwC, tells GlobeSt.com that two things are happening simultaneously: tenants are taking longer-term leases and rents are going up as a result.

“What we are seeing now is an end of the recession with a rise in expectations of tenant retention and high expectations in rent growth,” Roschelle says. “If you ask which one is the chicken and which one is the egg, since tenants are opting to stay put, landlords are more in the driver’s seat and can drive rents up.”

As the expectations of tenant retention approach the five-year average, rents are poised to inch up even further, PwC finds. “We have tenants staying, less hopping and longer-term leases, which is great for value,” Roschelle says. “If you were to acquire a building, you would acquire a building that had longer-term leases and probably pay a lower cap rate than something that has short durations of leases. Plus, if you were to acquire a building during a period of rising rents, you’d probably pay a lower cap rate you’ll get rent depreciation over a period of time.”

Respondents predicted that average office rents would grow in gateway areas like San Francisco (5.75%), New York (5.21%), the Pacific Northwest (4.17%), Los Angeles (2.3%) and Northern Virginia (1.67%) in 2012. At the same time, some investors are hesitant about government-dependent cities, such as Washington, DC, where municipal, state and federal job cuts are occurring.

“The more you get away from a core market, the more local the drivers are,” Roschelle says. “Core markets have proven that they have a diverse enough employment base and a greater propensity to create jobs. When you get into smaller markets, they tend to be more dependent upon one large employer or one large industry.”

On a nationwide basis, the survey indicated that office markets with a strong technology, education or energy sector are driving investor interest. Roschelle says secondary markets like Austin, TX; Raleigh-Durham, NC; Charlotte, NC; San Jose, CA; Phoenix, AZ; and Salt Lake City, UT have “a lot of traction to them” based upon employment growth in emerging fields.

“Those are secondary markets that have a diverse enough employment base and a component of technology in that employment base that has investors optimistic that there will be job growth in that market,” he says.

The survey also found the average overall capitalization rate decreased in 22 of the 31 surveyed markets across the county, a sign that cap rates are continuing to compress in core markets. As a result, investors are turning to secondary markets to enhance yields—but having local market knowledge is key.

“What was surprising to me about this survey result was considering the slowness of job growth in our country, I would have thought that the office sector would remain challenged,” Roschelle says. “The fact that we are seeing real rent growth expected for 2012, it is encouraging to be that we will see better news for the office sector as a whole.”

Enter multifamily. During 2011, the abundance of interested buyers of multifamily product was outmatched only by the abundance of renters. Peter Muoio, principal with Apartment Realty Advisors’ ARA Research in New York City, tells it by the numbers. Vacancies in 2011 dropped 200 basis points year-over-year, while effective rents ended up well above pre-recession levels. Along those lines, homeownership has declined approximately 200 basis points, and according to Muoio, every 100-basis-point change in the ownership rate accounts for “about 1.2 million households that are shifting where they’re living.”

Bank of America Merrill Lynch’s October 2011 report demonstrated similar positive numbers, noting that revenues per available unit were up 6.3% year-over-year in the top 20 metropolitan US markets. The report also pointed out that October occupancy had increased 60 bps over the year, as had effective rental rates, which were up 5.6%.

All of this means increasing investment activity. Real Capital Analytics’ third-quarter 2011 review pegged overall sales volume at $13.3 billion during the quarter, complete with cap rate compression acceleration. Current trade volumes, RCA noted, returned to 2004 levels—in other words, before everyone went condo-conversion crazy. Given everything, it’s no wonder that four institutions are said to be bidding on all, or part, of the reportedly up-for-grabs Archstone portfolio (the most recent of which is Sam Zell’s Equity Residential), which is currently being held by various lending institutions.

“Both Google and Microsoft are committed to expanding their presence in a major way in Cambridge over the next couple of years,” Caroll explains in an interview with GlobeSt.com. “We also know that in Cambridge itself, Biogen Idec is going to move to a 495,000-square-foot headquarters. These demand-drivers for the most part are going to affect the urban core and Boston and Cambridge occupancy over the next couple of years.”

Caroll believes that the area’s “diverse array of industries” will assist in bringing down vacancy rates and generating absorption. And there are some big names interested in Greater Boston space, running the gamut from Google, to locally-based Akamai and others like the out-of-market Pfizer. According to Caroll, it seems that 2012 will not only bring reasons for these and other companies to stay, but hopefully for more firms to come to the area. He cites 1.6 million square feet of office product that is already 100% pre-leased. He also feels that these businesses (and others like TJ Maxx and Marshall’s owner TJX, BJ’s Wholesale Club and Staples) are drawn to Boston’s identity as a “knowledge-driven market in an increasingly knowledge-driven economy.”

“After being challenged in 2008 and 2009, the Greater Boston market has really enjoyed a very strong 2011 from a demand perspective and a resurgence in new construction which is 100% committed by new occupancy,” he explains. “It will be interesting to see if the demand sustains itself into 2012.”

Does Anyone Care About Asbestos Anymore?

A New Neighborhood Blight?

This is the story of a real-estate deal that McDonald's Corp. didn't do, a dud that raises new concerns about the problem of shuttered retail properties blighting the suburban landscape.

Every year, national chains like McDonald's and Wal-Mart Stores Inc. close scores of outlets and sell the surplus property they own. Many of them get purchased and filled with other businesses.

But lately, real-estate brokers and investors report, demand is weakening for marginal locations. The slow sales of the surplus properties reflect the economic downturn and the high retail vacancy rates in numerous markets throughout the country.