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                                                                                                                                               August 10, 2012   


The secret of success is to know something nobody else knows.  -- Aristotle Onassis

In This Issue
Regional Events
Empty Buildings Are Promising and Problematic
Deal Gives Aerojet a Big Boost
Collections Against Businesses Drop
Three Banks Report Mostly Good Earnings
Multifamily Investment Remains Hot
Fits and Starts For CRE Volume
Impact of Affordable Care Act on Seniors
Top CRE Firms Report Solid Mid-Year Returns
Beauty is As Beauty Does
Price of Construction Materials Levels Off
Mid-Year 2012 CRE Outlook
CMBS Market Still Active
Appraisers Are Your Gatekeepers to Gift Tax Deadline


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by Sanford Nax

Commercial real estate agents are allowing themselves to imagine a day when the market bounces back from the Great Recession. And they're trying to imagine how the Great Reset will affect office trends.

What will that market look like? For starters, there will be few new offices, except for the occasional build-to-suit job, until at least 2017, many say.


Although business appears to be picking up in recent months, it will be years before some neighborhoods are back to a "healthy" occupancy level.


Today's vacancy rates are high as companies have downsized, merged or exited the marketplace. The overall vacancy rate in the Sacramento area is in the mid-20 percent range, and even higher in the suburbs.

Thus, construction will be limited for the next five to seven years while landlords struggle to fill the holes. Rent concessions will be the norm, but some property owners are likely to use more creative, or drastic, measures. (Sacramento Business Journal) Office Market 



by Sanford Nax

Storefronts are beginning to fill up again in the Sacramento region as retailers backfill space that became empty during the Great Reset, according to second-quarter reports.

CBRE reported 213,435 square feet of vacant space was filled during the second quarter, which is a continuation of a positive trend. More than 410,000 square feet of net gains were reported during the first half. So-called big box space was a beneficiary, absorbing 135,000 square feet of new tenants, especially in Citrus Heights, where ethnic market Pacific Coast Company took the former Big Lots location on Greenback Lane.

Likewise, an Indian banquet hall leased the former Fast Track Hobbies space on Sunrise Vista Drive, and Ashley Furniture bought the former Sam's Club building at The Promenade at Sacramento Gateway.

Some new restaurants debuted in the area, including Chick-fil-A at Broadstone Plaza in Folsom, and Freebirds World Burrito at Laguna Gateway II in Elk Grove. But it wasn't all gains; some closures occurred too. Fashion Bug said it will close its store in Roseville by early 2013, and Scott's Seafood Grill & Bar closed in Loehmann's Plaza. (Sacramento Business Journal) Fill Empty Space 




Representing A Commercial Tenant

Wednesday, September 12 -- 8:30 - 10:00 a.m.

Instructor: Bill Hunter, Esquire

REALTORS® and SAR Members -- $10/All Others -- $15


For this program, Bill Hunter will focus upon tenant brokerage, i.e., representing the tenant in commercial lease negotiations. His outline will cover the tenant's pocket-book issues such as rental adjustments, building expenses, CAM charges, limitations on personal liability, construction responsibilities, and payment of the brokerage commission. Tenant "exit strategies," such as subletting and early termination rights, extension options, and non-recourse clauses and arrangements will also be discussed.  

  • What is a "triple-net" lease?
  • What is CAM in a shopping center lease?
  • Should office "pass--throughs" be negotiated?
  • What rules govern percentage rents?
  • How should a "going to market" clause be written?
  • What does "maintain and repair" actually mean?
  • Is the destruction clause "just boilerplate?"
  • What insurance can reasonably be required?
  • Who owes rents accruing after assignment of a lease?
  • How are the use and subletting clauses related?

As always, Bill will run an extensive Q & A period at the conclusion of this course. Register by calling Brian at 916-437-1210 or use this form.



CCIM's Introduction to Commercial Investment Real Estate Analysis

September 12 & 13

SAR's Mack Powell Auditorium


CCIM's introductory course teaches you the fundamentals of the commercial investment real estate industry and demonstrates how to apply these skills using real-world case studies. You will have the self-confidence to answer your clients' questions, anticipate their concerns and plan for their needs when you have a solid commercial foundation from which to start.

  • Solve investment problems using a financial calculator.
  • Perform basic mortgage calculations using compounding and discounting techniques.
  • Understand basic real estate investment analysis tools, estimate net operating income and estimate cash flows before tax.
  • Calculate the internal rate of return.
  • Evaluate similar properties, project vacancy rates and estimate absorption figures.  Course Flyer


Green Due Diligence - Fact or Fiction?  A "Lunch and Learn" Program

Tuesday, September 25 - 11:30 a.m. to 1:00 p.m.

Speaker: Michele Skupic

REALTORS® and SAR Members -- $10/All Others -- $15 


The emerging evolution of benchmarking and rating criteria for energy-efficient buildings continues to move swiftly and is forcing commercial real estate practitioners to determine how climate change and sustainability issues MUST be integrated into lease and sale transactions. The following questions will be addressed at this session: 

  • Why should I care?
  • Who is driving the green train?
  • What are the risks?
  • Where are the rewards?

Lunch is included in this session so you must pre-register! Let us know if you require a vegetarian option. Don't miss this new and informative program. Register by calling Brian at 916-437-1210 or use this course flyer.



How To Write A Letter Of Intent

Wednesday, October 3 -- 8:30 - 10:30 a.m.

Instructor: Sheryl Smith, CCIM

REALTORS® and SAR Members $15/ All Others $20                     


Leasing is a critical part of commercial real estate. When doing a lease transaction, the Letter of Intent (LOI) is the central player. It is also sometimes used for a purchase transaction, but mostly for leasing. Whether you are representing a tenant, landlord, buyer, or seller, an LOI can be an effective tool. The seminar is perfectly suited for incoming commercial practitioners and those revamping your skills. The following items plus much more will be highlighted:  

  • What is the purpose of the Letter Of Intent?
  • LOI or Purchase Agreement -- When to use what?
  • Are there different types of LOI's?
  • How are Exhibits used in an LOI?
  • How do I get paid on a lease?
  • How do I find space that is available for lease?

Join us for this fun and informative seminar and walk away with an LOI structure that you can use immediately. Call Brian at 916-437-1210 to register or use this form.




Investment Forum
Tuesday, August 14 -- 7:30 a.m.
R.J. Grins In The DoubleTree Hotel
E-mail for additional information

Sacramento Real Estate Exchange
Friday, August 17 -- 10:30 a.m.
China Buffet in Citrus Heights
Call Ben Couch at (916)989-4652 for additional information 

Sacramento CCIM Chapter Luncheon
Thursday, September 13 at Downey Brand Law Firm
Call Blain Hardy at (360) 393-2494

C.A.R. "Commercial Day"
Wednesday, October 3 -- 8:00 a.m - 5:00 p.m.
Anaheim, CA   Flyer


Senate Passes Midnight Extension of "Immigrant Investor" Visa Program; Measure Poised for House Action in September

In one of its final acts before the August recess, the Senate passed a three-year extension of a visa program that encourages foreign investment in U.S. real estate and other development projects. The so-called EB-5 "immigrant investor" program is scheduled to expire at the end of September, but with the Senate's unanimous voice vote extension, is now teed-up for action by the House after Labor Day. 


One of the employment-based immigrant visa programs administered by the U.S. Citizen and Immigration Service (USCIS), EB-5 allows foreign investors to obtain permanent residency status in the U.S. if they make investments that are channeled by one of 225 "regional centers" across the nation and demonstrate American job growth. A growing number of real estate companies have tapped into EB-5 as a creative means to assemble funds for a variety of development projects and feel that these funds are a creative source to underwrite energy efficiency "retrofits" of existing commercial and large multifamily buildings. (Real Estate Roundtable)  Immigrant Investor Program 



Prosperous Representation Practices and View from the Edge
Jones Lang LaSalle-Los Angeles Executive Vice President Sam Foster, CCIM is featured in this latest Commercial Intelligence Briefing as he discusses his new program called "View From the Edge." Additionally, he touches on tenant representation and how this specialty fits in the world of corporate real estate. Listen here

Flood Insurance Win
Join NAR Treasurer Bill Armstrong as he talks about the recent five-year reauthorization of the National Flood Insurance Program and what it means for the commercial sector. Listen Here


by Robert Celaschi

An old-line Sacramento developer supposedly once said, "The only ugly building is an empty building." By that measure, the Sacramento region has a lot of ugly office buildings.  Some have been that way since the economy itself turned ugly in 2008.

From the outside, the buildings might be quite attractive. The ugliness is on paper: no tenants bringing cash in; maintenance and property taxes bleeding money out. For the people in charge of selling or filling those structures, empty buildings offer a few advantages but a lot more challenges. The reality is (that) shell space in this marketplace just doesn't compete," said Robb Osborne, Senior Vice President with Voit Real Estate Services.

Even in shell condition, a building may have a lot of finished elements, a few, or none at all. A truly bare-bones building is called a cold shell. It's typically the hardest to sell or fill. But many a building can become attractive if the price is right. (Sacramento Business Journal) Empty Buildings 



by Mark Anderson


By acquiring Southern California-based Rocketdyne, GenCorp Inc. is poised to become the Sacramento region's largest public company -- and to better compete for business in the rapidly evolving aerospace industry.


The Rancho Cordova-based parent of Aerojet on Monday announced it would spend $550 million for Pratt & Whitney Rocketdyne of Canoga Park. If the deal is consummated as envisioned next year, GenCorp would have combined revenue estimated at nearly $1.7 billion. That would far surpass the region's current top public company, newspaper publisher The McClatchy Co. "This is a transformative event for the company," said Kathy Redd, GenCorp's Chief Financial Officer.


The acquisition also reinforces GenCorp's focus on aerospace. A subsidiary seeks to develop the company's vast land holdings in eastern Sacramento County but that venture has slowed with the real estate crash. Rocketdyne has about 2,200 employees at two locations each in California and Florida as well as in offices in Alabama, Mississippi and New Jersey.


"They bring a piece of the portfolio that we have not had before," said Aerojet Vice President Dirk Bregard. "It opens a market in the space arena we have not had." (Sacramento Business Journal)


by Kathy Robertson
The number of new accounts placed in collection by one business against another in the second quarter of 2012 was down 6.8% from the same period a year ago, suggesting slow economic recovery.

There was an almost 13% decline in collections during the 12 months ending June 30, 2012 from the previous year. The amount placed in collection dropped 6.4%, to $12.5 million for the year ended June 30, 2012 from $13.4 million for the same period in 2011, according to data from the second quarter collectability survey by the Commercial Collection Agency Association.

The average amount placed in collection rose 7.4%, to $2,015 from $1,876.

"The anemic recovery continues to crawl forward while several industry segments continue to struggle," said Robert Biko, Vice President of Sales at Northern California Collection Service in Sacramento. "Our clients in construction, real estate, media and industrial supply have yet to feel much of a recovery, while food and beverage, health care, technology, banking, law firms and hospitality are faring a bit better." (Sacramento Business Journal) Collections Against Businesses



Three local banks this week reported higher assets and mostly increased earnings for the quarter ending June 30. But two of the three also reported declining loan balances.

American River Bank's holding company said net income was $845,000 in the second quarter, up from $221,000 for the same period in 2011. American River Bankshares, based in Rancho Cordova, reported assets of $590 million on June 30, up from $570 million a year earlier.

The bank said fewer bad loans allowed it to set aside less money for losses, improving profitability. But the bank saw a decline in loan assets from a year earlier. Net loans were $278 million on June 30, down from $294 million a year earlier. Real estate loans were $232 million, down from $255 million; commercial loans were $37 million, down from $48 million. (Sacramento Business Journal) Mostly Good Earnings


by Randyl Drummer

Apartment landlords and investors continue to benefit from strong demand as the multifamily shifts from recovery into growth and development mode, according to a pair of new surveys of CRE executives and investors. 

For the sixth quarter in a row, the National Multi Housing Council Quarterly Survey of Apartment Market Conditions showed improvement across all four indexes measuring supply and demand and financing for multifamily properties. 

"The apartment sector's strength continues unabated," said NMHC Chief Economist Mark Obrinsky. "Even as new construction ramps up, higher demand for apartment residences still outstrips new supply with no letup in sight." 

Despite the demand for new apartments, acquisition and construction finance remains constrained in all but the best properties in the top markets, however, according to the NMHC second-quarter survey. The survey of 82 CEOs and other senior executives of apartment-related firms nationwide is considered a very timely snapshot of multifamily industry sentiment. (CoStar) Multifamily Investment Remains Hot


Pricing Trends

by Bendix Anderson

The commercial real estate recovery, like the rest of the economy, had a late spring slowdown. "We had a strong first quarter and a softer second quarter as investors became concerned about sovereign debt issues," says Janice Stanton, Senior Managing Director of Capital Markets for commercial real estate broker Cushman & Wakefield.


Commercial real estate brokers and researchers see a similar stall in momentum. The strongest activity is still confined to a few large cities, but large parts of the rest of the country are still working out the wreckage of the real estate crash.
"Momentum has tempered," says Dan Fasulo, Managing Director for data firm Real Capital Analytics. "We are not seeing the year-over-year gains that we were seeing last year." Real estate investors traded $108 billion in properties in the first half of this year, according to Real Capital. The number is either up 6 percent, excluding transactions associated with mergers and acquisitions, or it was down 17 percent, including the boom in mergers and acquisitions last year.


Either way, the market is no longer delivering clear, solid gains. Each quarter for more than a year, volume has stayed in the $50 to $60 billion range. Prices are still inching upwards for most property types, but slowly, according to Real Capital.

"Investment sales have rebounded to 2004 and 2005 levels," says C&W's Stanton. Investors still mainly concentrate on a few leading cities, though they are beginning to look further afield. "Gateway cities led the recovery, but increasingly investors are looking to secondary markets for yield. The focus is either on durable cash flows in secondary markets, or secondary assets in primary markets," she says.


Stanton is hopeful for the third quarter. "The market has definitely picked up again," she says. "C&W's investment sales pipeline is currently up about 30 percent on a year over year basis." International buyers are helping. "The U.S. has outperformed the global real estate investment markets," she says. In contrast, global activity is down almost 20 percent on a year-over-year basis. (NREIOnline) Fits and Starts for CRE





by Jennifer V. Hughes

When the Supreme Court upheld the Affordable Care Act (ACA) in June, it brought out strong reactions from the political, health care and public arenas.

The responses about the high court's decision from the seniors housing investment sector have been more subdued. Several real estate executives didn't even want to comment on the issue. Others said there is still too much controversy that needs to be settled as politicians vow to repeal the act. "Basically, it's too early to determine what the impact will be," says Richard Donohue, Managing Director for Seniors Housing/Healthcare with Lee & Associates NYC.

Donohue notes that the larger issues of slow job growth and market turmoil in Europe will likely have a greater impact on seniors housing than the ACA.

"Having said all that, people will still seek investments which will provide reasonable returns," he adds, and seniors housing is one of the safest bets in the marketplace.

Bob Kramer, President of the National Investment Center for the Seniors Housing and Care Industry, says the ruling has not had much of an impact on the private-pay market when it comes to investing. "I do think it might have been one of a number of factors that had an impact on skilled nursing," Kramer says. "Many people felt that it was one of the major uncertainties, like a cloud, and that may have caused people to hang back as investors." (NREIOnline) Seniors Housing



By Randyl Drummer

CEOs of the major publicly traded real estate services firms hit on several of the same themes this week in outlining their mid-year financial results, presenting a portrait of busier transaction activity and improving property fundamentals in a still tentative real estate recovery, hindered by uncertainty over the U.S. elections -- and especially, slower-than-expected job growth and other setbacks in the ongoing saga of the U.S., global and European economic recoveries.

Common themes in conference calls for second-quarter and six-month financial reports by executives for CBRE Group, Jones Lang LaSalle, HFF Inc. and FirstService Corp., parent of Colliers International -- companies at the center of real estate activity and market conditions -- included solid growth in investments sales activity, especially in the Americas; and weaker leasing revenues as landlords and tenants put off making decisions.

Other themes sounded by CEOs and their teams included:  

  • Growth in outsourcing business by the industry's two largest players, CBRE and JLL, as global companies strive to become more efficient in light of the global economic slowdown.
  • Increasing operational expenses from investments in higher sales headcounts, and acquisition and integration costs which cut into several firms' margins.
  • Year-over-year growth in commercial mortgage brokerage business driven by continued capital availability, generally low interest rates, competitive spreads and investors continued search for yield. (CoStar) Mid-Year Returns

by Mark Heschmeyer

It certainly appears to be true that society favors the beautiful. In real estate there is even a phrase for it: curb appeal. And commercial brokers know there can be a payoff to property that looks better than the other buildings around it.

But while beauty may be in the eye of the beholder, is there perhaps a correlation between better economic benefits in a building and its appearance? CoStar News analyzed the performance of two very specific subsets of office properties and compared their performance with all existing Class A office buildings in the country.

The buildings in the subsets achieved a higher rate of tenant retention during the Great Recession and regained tenants much more quickly as markets have recovered. Rental rates in these properties did not decline nearly as much, started recovering earlier and have moved up much more quickly than rents in all other Class A properties.


"It's pretty clear, these buildings held their occupancy better during the worst of the recession. In the heat, they held on to their tenants and were the first to recover while the rest have been playing catch up," said Joseph W. Markling, Chairman of BOMA International and Managing Director of Strategic Accounts at CBRE, who reviewed the analysis. (CoStar) Beautiful Buildings



by Mark Billingsley 
Prices for some key construction materials are down this year after a spike in 2011, but a rise in even one basic product is enough to set off alarm bells for some.

Anthony Martinez, for example, was stunned when he read the letter from a national drywall supplier. The construction manager for Sacramento-based HDR Architecture Inc. would be facing a heart-stopping 35 percent increase in drywall costs for 2012.

Martinez found it hard to understand how materials could be getting more expensive with the construction business far below its peak locally and nationally.

"It was price collusion - that's how I saw it," Martinez said. "Not one company kept their costs down. They all increased them about 35% across the board. Everyone is getting hammered."

It's unclear what might account for the cost increases, but construction activity is finally beginning to improve. Private nonresidential building, for example, was up 16.9% in May from February 2012 - the highest percentage increase since December 2008, the Associated General Contractors of California reported. (Sacramento Business Journal) Construction Materials Price



OutlookInvestor confidence in the commercial real estate recovery has not been shaken by the latest jolt of economic uncertainty. Investors' views of commercial real estate barely budged in the second quarter, according to results from the NREI/Marcus & Millichap Investor Sentiment Survey. The Investor Sentiment Index, which measures investor views on key fundamentals such as rising property values and plans to increase holdings, dipped just 2 points from 166 in first quarter to 164 in second quarter. To review the report, click here.  


by Elaine Misonzhnik

CMBS lenders are putting together new deals, but issuance for the full year 2012 will likely once again fall below expectations.

Year-to-date, the U.S. commercial real estate market saw $22.5 billion in new CMBS issuance, according to Commercial Mortgage Alert, an industry newsletter. Somewhere close to $10 billion in additional deals might come to market in the coming months, according to Commercial Real Estate Direct, another industry publication. That would put 2012's non-agency CMBS volume on par with 2011's $32.9 billion, but fall $15 to $20 billion short of earlier expectations, according to Ken Cheng, Managing Director for CMBS new issuance ratings with Horsham, Pa.-based Morningstar Credit Ratings LLC.

"It's looking like [issuance] is going to be flat with last year," Cheng says. "I think part of it is probably the spreads that are keeping the cost of funding in the CMBS market relatively high. The pricing hasn't gone down as much as people hoped to make it more competitive. Some of it is driven by what's happening in Europe, a lot of geopolitical forces certainly affect this marketplace."

As of July 26, spreads on triple A-rated, 10-year fixed-rate CMBS notes averaged 148 basis points, according to Commercial Mortgage Alert-10 basis points below their 52-week average. Spreads on triple B-rated, 10-year notes, however, were at 545 basis points. (NREIOnline) Market Volume Dashes Hopes 



 by Lou Corlazo


Faced with the possibility of the lifetime gift tax exemption dropping precipitously next year and the estate tax rate rising, wealthy individuals are rushing to transfer their assets to family members.

It is no wonder that 73-year-old commercial real estate appraiser Jim Levy is busier now than he ever was -- and that is saying a lot, considering he has been in the business for 50 years at Appraisers and Planners Inc. of New York City, which his father started in 1933. "It's crazy right now," says Levy. "And this is just the beginning."

Right now, federal law provides a lifetime gift tax exemption of $5.12 million for individuals, and double that amount for married couples pooling their resources.

What is more, estate taxes on anything above that cap top out at 35%, 15 percentage points lower than the ceiling just a decade ago. But unless Congress extends this Bush-era tax cut beyond 2012, the cap will return to its lowest level since 2002: $1 million per person, with a top tax rate of 55%. (Reuters) Tax Appraisers